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Monetary Contracting between Central Banks and the Design of Sustainable Exchange-Rate Zones (Reprint 035)

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  • Francisco Delgado
  • Bernard Dumas
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    Abstract

    An exchange-rate system is a set of contracts which commits Central Banks to intervene in the foreign-exchange market. The design features of the system include: the rules of intervention, the limits placed on exchange rates and the "crisis scenario" which describes possible transitions to new regimes in case one Central bank runs out of reserves or borrowing capacity. This paper considers the various trade-offs one faces in designing an exchange-rate system. Svensson (1989) has already analyzed the degree of variability in the exchange rate, the interest rate and the fundamentals. But the tradeoff also pertains to the amount of reserves which the Central banks must have on hand in order to forestall a speculative attack and make the system sustainable. The amount of reserves needed depends crucially on the assumed crisis scenario.

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    Bibliographic Info

    Paper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 20-90.

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    Handle: RePEc:fth:pennfi:20-90

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    Cited by:
    1. Buiter, Willem H & Pesenti, Paolo, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," CEPR Discussion Papers 479, C.E.P.R. Discussion Papers.
    2. Svensson, Lars E. O., 1992. "The foreign exchange risk premium in a target zone with devaluation risk," Journal of International Economics, Elsevier, vol. 33(1-2), pages 21-40, August.
    3. Dumas, B. & Svensson, L.E.O., 1991. "How Long do Unilateral Target Zones last?," Weiss Center Working Papers 1991-2, Wharton School - Weiss Center for International Financial Research.
    4. Dominique Hachette & Fernando Ossa & Francisco Rosende, 1996. "Aspectos Monetarios y Macroeconómicos de la Integración," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 33(98), pages 153-183.
    5. Bertola, Giuseppe & Svensson, Lars E O, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 689-712, July.
    6. Dumas, B. & Jennergren, L.P. & Naslund, B., 1993. "Currency Option Pricing in Credible Target Zones," Weiss Center Working Papers 93-7, Wharton School - Weiss Center for International Financial Research.

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