Inside the Impossible Triangle: Monetary Policy Autonomy in a Credible Target Zone

Abstract: This paper examines the trade-off between exchange rate stability and monetary autonomy for a target zone. Using the guilder-mark target zone in the pre-EMU period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder-mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade-off compared to the corner solutions (free float and monetary union), which is consistent with the ‘fear of floating’ phenomenon.

Keywords: exchange rate regimes; monetary union; monetary autonomy; fear of floating; trilemma (search for similar items in EconPapers)
JEL-codes: E52 F33 F41 F42 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-mac and nep-mon
Date: Written 2003-12-24
Note: Type of Document - pdf; prepared on PC Win98; to print on Deskjet, A4 paper; pages: 18; figures: within document
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http://129.3.20.41/eps/mac/papers/0312/0312009.pdf (application/pdf)

Related works:
Working Paper: Inside the Impossible Triangle:Monetary Policy Autonomy in a Credible Target Zone (2003)
Journal Article: INSIDE THE IMPOSSIBLE TRIANGLE: MONETARY POLICY AUTONOMY IN A CREDIBLE TARGET ZONE (2008)
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