Limited Reserves and the Optimal Width of an Exchange Rate Target zone

Simon Broome ()
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Simon Broome: National University of Ireland, Maynooth

Economics Department Working Paper Series from Department of Economics, National University of Ireland - Maynooth

Abstract: This paper analyses the stabilising properties of an exchange rate target zone when the stock of available reserves is limited. In these circumstances it is reasonable to suppose that the optimal bandwidth is affected by the expected lifetime of the zone. Our analysis uses Sutherland's (1995) target zone model to assess the importance of the expected lifetime in determining the optimal width of the zone. We find that the expected lifetime tends to widen the optimal bandwidth considerably but unless the stock of initial reserves is small and/or the fundamentals drift large, the extra lifetime bought is small in percentage terms.

Keywords: Stabilisation policy; exchange rate crises; optimal target zones (search for similar items in EconPapers)
JEL-codes: F31 F33 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2003-08
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Persistent link: https://EconPapers.repec.org/RePEc:may:mayecw:n1220803

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