Limited Reserves and the Optimal Width of an Exchange Rate Target zone
AbstractThis paper analyses the stabilising properties of an exchange rate target zone when the stock of available reserves is limited. In these circumstances it is reasonable to suppose that the optimal bandwidth is affected by the expected lifetime of the zone. Our analysis uses Sutherland's (1995) target zone model to assess the importance of the expected lifetime in determining the optimal width of the zone. We find that the expected lifetime tends to widen the optimal bandwidth considerably but unless the stock of initial reserves is small and/or the fundamentals drift large, the extra lifetime bought is small in percentage terms.
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Bibliographic InfoPaper provided by Department of Economics, Finance and Accounting, National University of Ireland - Maynooth in its series Economics, Finance and Accounting Department Working Paper Series with number n1220803.
Length: 34 pages
Date of creation: Aug 2003
Date of revision:
Stabilisation policy; exchange rate crises; optimal target zones;
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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