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Narrow Target Zones within Broad Zones: A Non-Speculative Exchange Rate Solution with Limited Resources

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  • Staffan Ringbom

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    Abstract

    A smooth exchange rate target zone solution that internalizes the time inconsistency problem and is completely free from speculation incentives exists where the monetary resources available for an exchange rate defense are limited and the target zone collapses with probability one. In the unique closed form solution, a soft internal narrow target zone slides during a sterilized defense when the reserves change. For a smooth regime collapse the exchange rate is non-smoothpasted to the free-float. A target zone defended at its official borders is inherently speculative and results in a randomized regime collapse for the monetary intervention. Copyright Kluwer Academic Publishers 2003

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    File URL: http://hdl.handle.net/10.1023/A:1023991305350
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    Bibliographic Info

    Article provided by Springer in its journal Open Economies Review.

    Volume (Year): 14 (2003)
    Issue (Month): 3 (July)
    Pages: 319-341

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    Handle: RePEc:kap:openec:v:14:y:2003:i:3:p:319-341

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    Web page: http://www.springerlink.com/link.asp?id=100323

    Related research

    Keywords: target zone; exchange rate; credibility; bounded reserves; regime switching;

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    Cited by:
    1. Timo Terasvirta, 2004. "A Time Series Model for an Exchange Rate in a Target Zone with Applications," Econometric Society 2004 Australasian Meetings 340, Econometric Society.

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