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On the Choice of an Exchange Rate Regime: Target Zones Revisited

Jess Rodr?uez L?ez and Hugo Rodr?uez Mendiz?al ()
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Hugo Rodr?uez Mendiz?al: http://idea.uab.es/~hrodriguez/

Authors registered in the RePEc Author Service: Jesús Rodríguez-López () and Hugo Rodriguez Mendizabal ()

UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)

Abstract: From the classical gold standard up to the current ERM2 arrangement of the European Union, target zones have been a widely used exchange regime in contemporary history. This paper presents a benchmark model that rationalizes the choice of target zones over the rest of regimes: the fixed rate, the free float and the managed float. It is shown that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature that previous models were not able to produce, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.

Keywords: Target zones; exchange rate agreements; monetary policy; time consistency. (search for similar items in EconPapers)
JEL-codes: E52 F31 F33 (search for similar items in EconPapers)
Pages: 36
Date: 2002-04-01
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:518.02

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