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Playing with the Band: Dynamic Effects of Target Zones in an Open Economy

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Author Info
Klein, Michael W

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Abstract

This paper applies techniques of regulated Brownian motion to a model of a small open economy to investigate how bands on fundamental driving variables affect the realization of the nominal exchange rate, the real exchange rate, prices, and output. The author shows that these bands mitigate the relationship between exogenous fundamentals and endogenous variables through their effects on expectations. He also considers the effects of changing the width of the band and finds greater stabilization of endogenous variables with more narrow bands on exogenous fundamentals. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 31 (1990)
Issue (Month): 4 (November)
Pages: 757-72
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Handle: RePEc:ier:iecrev:v:31:y:1990:i:4:p:757-72

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  1. Simon Broome, 2003. "Limited Reserves and the Optimal Width of an Exchange Rate Target zone," Economics, Finance and Accounting Department Working Paper Series n1220803, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth. [Downloadable!]
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  2. Lars E.O. Svensson, 1991. "Target Zones and Interest Rate Variability," NBER Working Papers 3218, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Zhen Zhu, 1997. "Dynamic Inconsistency And Exchange-Rate Target Zones: A Welfare Analysis," International Economic Journal, Korean International Economic Association, vol. 11(1), pages 15-38, April. [Downloadable!] (restricted)
  4. Willem H. Buiter & Paolo A. Pesenti, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," NBER Working Papers 3467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Kenneth A. Froot & Maurice Obstfeld, 1991. "Stochastic Process Switching: Some Simple Solutions," NBER Working Papers 2998, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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