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Stabilization Policy with Bands

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  • Daniel Gros

Abstract

This paper discusses stabilization policy in the presence of bands for the exchange rate. The bands are modelled in a probabilistic sense: monetary policy has to be such as to keep the probability, that the exchange rate stays within the bands, above a certain threshold. In contrast to other models of target zones, this formulation leads to a linear decision rule and implies sizeable intra-marginal interventions, which corresponds to the experience in the EMS. The extent to which short-run monetary policy is constraint by the bands depends on its own long-run components and on fiscal policy.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 90/49.

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Length: 24
Date of creation: 01 May 1990
Date of revision:
Handle: RePEc:imf:imfwpa:90/49

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Cited by:
  1. Lars E.O. Svensson, 1994. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," NBER Working Papers 4207, National Bureau of Economic Research, Inc.

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