A Critical Examination of Target Zones and Reflections on the EMS Experience

Niels Thygesen
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Niels Thygesen: Institute of Economics, University of Copenhagen

No 94-13, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: The target zone approach in its several incarnations and refinements into the blueprint addresses the central issues in international monetary reform. However, both theoretical considerations and the analysis of Europe's experience with a tight exchange rate system suggest that its recent versions have become overambitious by suggesting that the G7 countries coordinate both monetary and budgetary policies - something that the Europeans in their much more integrated economies have been reluctant to do over the past two decades. It is suggested that reverting to the narrower focus of the original proposal on exchange rate stabilization only may be warranted. The recent European experience with wide margins around firmly declared central rate may anyway be the best that can be done to achieve a considerable degree of exchange rate stability. The absence of major differences in national inflation rates makes such an approach look more feasible than any time in the past two decades.

Pages: 23 pages
Date: 1994-11
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:9413

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