Stabilization Policy with Bands

Daniel Gros

No 1990/049, IMF Working Papers from International Monetary Fund

Abstract: This paper discusses stabilization policy in the presence of bands for the exchange rate. The bands are modelled in a probabilistic sense: monetary policy has to be such as to keep the probability, that the exchange rate stays within the bands, above a certain threshold. In contrast to other models of target zones, this formulation leads to a linear decision rule and implies sizeable intra-marginal interventions, which corresponds to the experience in the EMS. The extent to which short-run monetary policy is constraint by the bands depends on its own long-run components and on fiscal policy.

Keywords: WP; exchange rate; exchange rate target; exchange rate variability; stabilization policy; exchange rate fluctuation; exchange rate commitment; exchange rate band; income elasticity; policy goal; price level; Exchange rates; Managed exchange rates; Personal income; Purchasing power parity (search for similar items in EconPapers)
Pages: 24
Date: 1990-05-01
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Citations: View citations in EconPapers (5)

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