In credible target zone regimes, exchange rates should, according to Krugman's 1991 theory, spend a disproportionate amount of time near the edges of the fluctuation band. The major application of this theory has been to the European Monetary System (EMS), with several authors reporting that exchange rate data for the EMS do not display this feature, but in contrast cluster towards the middle of the band. We show that such findings result from neglect of the multi-currency nature of the EMS and are overturned when account is taken of the full set of intervention obligations.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
845.
Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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