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The "Lack" of Volatility Trade-Offs in Exchange Rate Zones with Sticky Prices

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Author Info

  • Elias D. Belessakos

    (New York Life Investment Management, U.S.A.)

  • Christos I. Giannikos

    (Department of Economics and Finance, Baruch College, U.S.A.)

Abstract

In target zone regimes, volatility trade-offs between the nominal exchange rate and the nominal interest rate differential depend on the underlying monetary model assumption. In an economy with price rigidities there exists no such trade-off when the exchange rate overshoots.

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Bibliographic Info

Article provided by College of Business, and College of Finance, Feng Chia University, Taichung, Taiwan in its journal International Journal of Business and Economics.

Volume (Year): 1 (2002)
Issue (Month): 1 (April)
Pages: 69-78

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Handle: RePEc:ijb:journl:v:1:y:2002:i:1:p:69-78

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Related research

Keywords: exchange rate; target zones; volatility trade-offs; sticky prices; overshooting;

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References

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  1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  2. Lars E.O. Svensson, 1991. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," NBER Working Papers 3374, National Bureau of Economic Research, Inc.
  3. Svensson, L.E.O., 1989. "Target Zones And Interest Rate Variability," Papers 457, Stockholm - International Economic Studies.
  4. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  5. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
  6. Beetsma, R.M.W.J. & Ploeg, F. van der, 1994. "Macroeconomic stabilisation and intervention policy under an exchange rate band," Discussion Paper 1994-27, Tilburg University, Center for Economic Research.
  7. Lindberg, H. & Soderlind, P., 1991. "Testing the Basic Target Zone Model on Swedish Data," Papers 488, Stockholm - International Economic Studies.
  8. Bertola, G. & Svensson, L.E., 1990. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," Papers 481, Stockholm - International Economic Studies.
  9. Miller, Marcus & Weller, Paul, 1995. "Stochastic saddlepoint systems Stabilization policy and the stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 19(1-2), pages 279-302.
  10. Kempa, Bernd & Nelles, Michael & Pierdzioch, Christian, 1999. "The term structure of interest rates in a sticky-price target zone model," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 817-834, October.
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