The optimal degree of exchange rate flexibility: A target zone approach

Jesús Rodríguez López () and Hugo Rodriguez Mendizabal
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Jesús Rodríguez López: Department of Economics, Universidad Pablo de Olavide
Authors registered in the RePEc Author Service: Jesús Rodríguez-López ()

No 06.22, Working Papers from Universidad Pablo de Olavide, Department of Economics

Abstract: This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show 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 on target zones that previous models were not able to generate jointly, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage 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)
Pages: 34 pages
Date: 2006-09
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.upo.es/serv/bib/wps/econ0622.pdf First version, 2006 (application/pdf)

Related works:
Journal Article: The Optimal Degree of Exchange Rate Flexibility: a Target Zone Approach* (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:pab:wpaper:06.22

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