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Jess Rodr?uez L?ez Hugo Rodr?uez Mendiz?al ()

Registered author(s): Jesús Rodríguez-López Hugo Rodriguez Mendizabal

Abstract

From the classical gold standard up to the current ERM2 arrangement of the European Union, target zones have been a widely used exchange regime in contemporary history. This paper presents a benchmark model that rationalizes the choice of target zones over the rest of regimes: the fixed rate, the free float and the managed float. It is shown that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature that previous models were not able to produce, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.

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Bibliographic Info

Paper provided by Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) in its series UFAE and IAE Working Papers with number 518.02.

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Length: 36
Date of creation: 01 Apr 2002
Date of revision:
Handle: RePEc:aub:autbar:518.02

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Related research

Keywords: Target zones; exchange rate agreements; monetary policy; time consistency.;

Find related papers by JEL classification:

• E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
• F31 - International Economics - - International Finance - - - Foreign Exchange
• F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

This paper has been announced in the following NEP Reports:

• NEP-ALL-2002-07-21 (All new papers)
• NEP-FIN-2002-07-21 (Finance)
• NEP-IFN-2002-07-21 (International Finance)
• NEP-MAC-2002-07-21 (Macroeconomics)

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Citations

Cited by:
(explanations, RSS feed, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

1. Jesús Rodríguez López & Hugo Rodríguez Mendizábal, 2006. "How tight should one's hands be tied? Fear of floating and credibility of exchange regimes," Working Papers 06.03, Universidad Pablo de Olavide, Department of Economics.
2. Antonio Morales & Pablo Brañas Garza, 2003. "Computational Errors in Guessing Games1," Economic Working Papers at Centro de Estudios Andaluces E2003/11, Centro de Estudios Andaluces.

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