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Forward-rate target zones and exchange rate dynamics

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  • Lin, Hwan C.

Abstract

A target zone for the forward exchange rate is developed using a log-linear monetary model. Exchange rates are driven by a Wiener process. A central bank purchases or sells foreign exchange forward to keep the target forward rate in a specified band. Defending such a target zone does not require regulated Wiener process, for the central bank's forward exchange intervention can avoid disturbing the money supply. A forward-rate target zone can stabilize the spot rate against a free float and its stabilizing effects become more significant if the delivery term applying to the target forward rate is shorter.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 27 (2008)
Issue (Month): 5 (September)
Pages: 831-846

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Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:831-846

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Web page: http://www.elsevier.com/locate/inca/30443

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References

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