On the Choice of an Exchange Rate Regime: Target Zones Revisited
Jess Rodr?uez L?ez and
Hugo Rodr?uez Mendiz?al ()
Additional contact information
Hugo Rodr?uez Mendiz?al: http://idea.uab.es/~hrodriguez/
Authors registered in the RePEc Author Service: Hugo Rodriguez Mendizabal () and
Jesús Rodríguez-López ()
UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC)
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)
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2) Track citations by RSS feed
Downloads: (external link)
Working Paper: On the Choice of an Exchange Rate Regime: Target Zones Revisited (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:aub:autbar:518.02
Access Statistics for this paper
More papers in UFAE and IAE Working Papers from Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) Contact information at EDIRC.
Bibliographic data for series maintained by Xavier Vila ().