In this paper we consider a regime where several target zones coexist. Parities are defended by manipulating money supplies in participating countries. As a result, interventions aimed at one given exchange rate influence other exchange rates as well. Such ‘externalities’ are shown to have dramatic implications; shocks on each fundamental affect the whole range of exchange rates involved, intra-marginal interventions arise endogenously, and the exchange rate distribution does not exhibit the u-shaped pattern which is typical of traditional target zone models. Moreover, we compute the stationary distribution of exchange rates and fundamentals, and show that both are influenced by the ‘rules of the game’, i.e. currency used in interventions, sterilization procedures, etc.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1504.
Find related papers by JEL classification: E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit F31 - International Economics - - International Finance - - - Foreign Exchange
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