Target Zones and Realignment Expectations: The Israeli and Mexican Experiences

Alejandro M. Werner
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Alejandro M. Werner: International Monetary Fund

IMF Staff Papers, 1996, vol. 43, issue 3, 571-586

Abstract: This paper studies the Mexican and Israeli experiences with a target zone. The first part of the paper develops a model of exchange rate determination under a target zone regime with stochastic realignments and examines the conditions under which the adoption of the target zone, instead of a fixed exchange rate, reduces the volatility of the interest rate differential. We conclude that, if the variance of the expected realignment is sufficiently large, then the target zone will be useful. The second part of the paper is an empirical study that shows that the target zone regime helped reduce interest rate variability in Israel and Mexico by absorbing part of the shocks to the expected realignment with movements of the exchange rate inside the band.

JEL-codes: F4 (search for similar items in EconPapers)
Date: 1996
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pal:imfstp:v:43:y:1996:i:3:p:571-586

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