The Burden of Intervention: Externalities in Multilateral Exchange Rates Arrangements

Marc Flandreau (marc.flandreau@sciencespo.fr)
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Marc Flandreau: Sciences Po - Sciences Po, Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES

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Abstract: In this paper, the author considers a multilateral target zone model that generalizes Krugman's model of a bilateral target zone. Parities are defended by manipulating money supplies in participating countries. This means that interventions aimed at one given exchange rate influence other exchange rates as well. As a result of these 'externalities' shocks on each fundamental affect the whole range of exchange rates involved. Moreover, intramarginal interventions arise endogenously, and the exchange rate distribution does not exhibit the u-shaped pattern which is typical of traditional target zones. Instead, his model gives rise to 'intramarginal targets' to which exchange rates tend to return. The location of these targets is shown to depend on the intervention-sterilization mix adopted by monetary authorities

Date: 1998-06
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03416385
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Published in Journal of International Economic Law, 1998, 45 (1), pp.137 - 171

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