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Target Zones in Theory and History: Credibility, Efficiency, and Policy Autonomy

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  • Flandreau, Marc
  • Komlos, John

Abstract

A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones. Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5199.

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Date of creation: Aug 2005
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Handle: RePEc:cpr:ceprdp:5199

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Keywords: Austria-Hungary; covered interest parity; credibility; market efficiency hypothesis; monetary model; monetary policy; target zone;

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References

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  1. Svensson, L.E.O., 1990. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," Papers 466, Stockholm - International Economic Studies.
  2. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
  3. De Grauwe, Paul, 1996. "International Money: Postwar Trends and Theories," OUP Catalogue, Oxford University Press, edition 2, number 9780198775133, September.
  4. Bordo, Michael D. & MacDonald, Ronald, 2003. "The inter-war gold exchange standard: credibility and monetary independence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 1-32, February.
  5. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  6. Donald J. Mathieson & Robert P. Flood & Andrew K. Rose, 1991. "An Empirical Exploration of Exchange Rate Target-Zones," IMF Working Papers 91/15, International Monetary Fund.
  7. Bordo, Michael D. & MacDonald, Ronald, 2005. "Interest rate interactions in the classical gold standard, 1880-1914: was there any monetary independence?," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 307-327, March.
  8. Svensson, L.E.O., 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," Papers 521, Stockholm - International Economic Studies.
  9. Markus Knell & Helmut Stix, 2004. "Three Decades of Money Demand Studies. Some Differences and Remarkable Similarities," Working Papers 88, Oesterreichische Nationalbank (Austrian Central Bank).
  10. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August.
  11. Jeanne, Olivier, 1996. " Would a Tobin Tax Have Saved the EMS?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(4), pages 503-20, December.
  12. Koppl, Roger & Yeager, Leland B., 1996. "Big Players and Herding in Asset Markets: The Case of the Russian Ruble," Explorations in Economic History, Elsevier, vol. 33(3), pages 367-383, July.
  13. Frenkel, Jacob A & Levich, Richard M, 1975. "Covered Interest Arbitrage: Unexploited Profits?," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 325-38, April.
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Cited by:
  1. John Williamson, 2006. "A Worldwide System of Reference Rates," Working Papers 45, Bank of Greece.
  2. Marc Flandreau, 2006. "The logic of compromise : monetary bargaining in Austria-Hungary 1867-1913," Sciences Po publications n°5397, Sciences Po.
  3. Marc Flandreau, 2006. "Comments on J. Williamson: “A worldwide system of reference ratesâ€\x9D," International Economics and Economic Policy, Springer, vol. 3(3), pages 353-357, December.
  4. Rui Esteves & Jaime Reis, 2007. "Market Integration in the Golden Periphery,The Lisbon/London Exchange, 1854-1891," Economics Series Working Papers 338, University of Oxford, Department of Economics.
  5. Richard C.K. Burdekin & Kris James Mitchener & Marc D. Weidenmier, 2012. "Irving Fisher and Price‐Level Targeting in Austria: Was Silver the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 733-750, 06.
  6. Spivak, Avia & Sussman, Nathan, 2008. "Inflation Targeting as the New Golden Standard," CEPR Discussion Papers 7001, C.E.P.R. Discussion Papers.
  7. Flandreau, Marc & Oosterlinck, Kim, 2012. "Was the emergence of the international gold standard expected? Evidence from Indian Government securities," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 649-669.

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