A target zone model with the terminal condition of joining a currency area

Viktors Ajevskis ()

Applied Economics Letters, 2011, vol. 18, issue 13, pages 1273-1278

Abstract: This study aims to generalize the Krugman target zone model for the case of terminal condition of joining a currency area. Using the terminal condition and the 'smooth pasting conditions', both analytical and numerical solutions of the problem are obtained. The proposed model is more adequate than the Krugman one when the moment of joining currency area approaches. The properties of the model highlight that monetary authorities have some degree of monetary independence until the moment of entering a currency zone. The model's outcomes are consistent with dynamic properties of the exchange rate time series of the European countries that entered euro zone in January 1999.

Date: 2011
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