Target Zone Models with Price Inertia: Solutions and Testable Implications

Alan Sutherland ()

Economic Journal, 1994, vol. 104, issue 422, 96-112

Abstract: Many recent papers suggest that the basic flex-price target zone model does not perform well empirically. This paper investigates the testable implications of a sticky-price target zone model and finds that, to a limited extent, it has a better empirical performance than the simplest flex-price model. However, in terms of nominal variables, the sticky-price model is found to be observationally equivalent to the flex-price model when the latter is extended to include intramarginal intervention and realignments. Copyright 1994 by Royal Economic Society.

Date: 1994
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