Economics at your fingertips  

On the Evolution of Credibility and Flexible Exchange Rate Target Zones

Renzo Avesani, Giampiero Gallo () and Mark Salmon ()

No 1123, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper considers a new approach to the optimal management and analysis of exchange rate target zones by regarding the operation of a target zone as a dynamic signalling game between the monetary authorities and the financial markets. A Sequential Open Loop (Feedback) policy of sterilized intervention is proposed that depends critically on the evolution of the policy-maker's credibility as opposed to the open loop precommitment strategy that has been implemented, for instance, in the Exchange Rate Mechanism of the EMS and in the Bretton Woods system. The width of the target zone and realignments are in turn determined optimally given the policy-maker's credibility. A commitment to this form of flexible target zone is shown through simulation to provide substantial stabilization for the exchange rate while retaining considerable flexibility and robustness in response to shocks.

Keywords: Credibility; Dynamic Policy; Exchange Rate Target Zones; Flexibility; Incentive Compatability Sterilized Intervention; Signalling (search for similar items in EconPapers)
JEL-codes: F02 F31 F33 F36 F42 (search for similar items in EconPapers)
Date: 1995-02
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

Related works:
Working Paper: On the Evolution of Credibility and Flexible Exchange Rate Target Zones (1999) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This working paper can be ordered from ... ers/dp.php?dpno=1123

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

Page updated 2019-08-01
Handle: RePEc:cpr:ceprdp:1123