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Choosing the Width of Exchange Rate Bands - Credibility vs. Flexibility

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Author Info

  • Cukierman, Alex
  • Leiderman, Leonardo
  • Spiegel, Yossi

Abstract

The purpose of this paper is to provide a framework for the analysis of policy-makers' choices regarding unilateral exchange rate bands. Exchange rate bands are viewed as the outcome of an optimization problem by a policy-maker whose objective function weighs the level of the real exchange rate against the level and variability of the real exchange rate. The analysis endogenizes policy decisions about realignments and about the width of the band. Conditions are developed for the case in which optimal band width widens in response to a decrease in policy-makers' commitment reputation, an increase in the cost of reneging on the existing band, and an increase in the variance of fundamental shocks.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 907.

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Date of creation: Jan 1994
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Handle: RePEc:cpr:ceprdp:907

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Related research

Keywords: Commitment; Credibility; Exchange Rates; Realignments;

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Cited by:
  1. Andres Velasco, 1996. "When Are Fixed Exchange Rates Really Fixed?," NBER Working Papers 5842, National Bureau of Economic Research, Inc.
  2. Cukierman, A., 1996. "Targeting Monetary Aggregates and Inflation in Europe," Papers 37-96, Tel Aviv.
  3. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.
  4. Velasco, Andres, 1997. "When are fixed exchange rates really fixed?," Journal of Development Economics, Elsevier, vol. 54(1), pages 5-25, October.
  5. Jeffrey Sachs & Aaron Tornell & Andres Velasco, 1996. "The Mexican Peso Crisis: Sudden Death or Death Foretold?," Harvard Institute of Economic Research Working Papers 1760, Harvard - Institute of Economic Research.

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