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Why Have a Target Zone?

Author

Listed:
  • Krugman, Paul
  • Miller, Marcus

Abstract

The desire to avoid speculative runs on currencies appears to be one of the main reasons leading policy-makers to impose currency bands, but the standard analysis of target zones rules out any speculative inefficiencies by assumption. As an alternative we first present simple models of excess volatility due to stop-loss trading and then go on to consider what target zones might accomplish in this context. The principal result is that the speculation of informed traders shifts from being destabilizing to stabilizing, once the target zone assures them that stop-loss orders will not be triggered.

Suggested Citation

  • Krugman, Paul & Miller, Marcus, 1992. "Why Have a Target Zone?," CEPR Discussion Papers 718, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:718
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    Keywords

    Exchange Rates; Speculation; Stabilization; Target Zones;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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