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

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

No 87, Working Papers from Barcelona School of Economics

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 generate, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchange 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)
Date: 2015-09
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: On the Choice of an Exchange Rate Regime: Target Zones Revisited (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:87

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