The European Monetary System and the Theory of Target Zones

Patrick Honohan

No 845, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In credible target zone regimes, exchange rates should, according to Krugman's 1991 theory, spend a disproportionate amount of time near the edges of the fluctuation band. The major application of this theory has been to the European Monetary System (EMS), with several authors reporting that exchange rate data for the EMS do not display this feature, but in contrast cluster towards the middle of the band. We show that such findings result from neglect of the multi-currency nature of the EMS and are overturned when account is taken of the full set of intervention obligations.

Keywords: European Monetary System; Exchange Rates; Target Zones (search for similar items in EconPapers)
JEL-codes: F31 F33 (search for similar items in EconPapers)
Date: 1993-09
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Citations: View citations in EconPapers (5)

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