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Target Zones and Exchange Rate Dynamics

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Author Info
Krugman, Paul R

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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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Publisher 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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