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Target Zones and Exchange Rate Dynamics

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  • Krugman, Paul R

Abstract

This paper develops a simple model of exchange rate behavior under a target zone regime. It shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is, thus, not being defended actively. Somewhat surprisingly, the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty. Copyright 1991, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 106 (1991)
Issue (Month): 3 (August)
Pages: 669-82

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Handle: RePEc:tpr:qjecon:v:106:y:1991:i:3:p:669-82

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  1. Robert P. Flood & Peter M. Garber, 1982. "A model of stochastic process switching," International Finance Discussion Papers 201, Board of Governors of the Federal Reserve System (U.S.).
  2. Paul R. Krugman, 1987. "Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets," NBER Working Papers 2459, National Bureau of Economic Research, Inc.
  3. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 9-57, January.
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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Krugman on blogs
    by UDADISI in udadisi on 2011-10-19 13:42:00
  2. Krugman on the Econoblogosphere
    by UDADISI in udadisi on 2012-01-18 01:39:00
  3. Open Science And The Econoblogosphere
    by Paul Krugman in The Conscience of a Liberal on 2012-01-17 16:30:00
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