Limited Reserves and the Optimal Width of an Exchange Rate Target zone

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Limited Reserves and the Optimal Width of an Exchange Rate Target zone

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Simon Broome () (National University of Ireland, Maynooth)

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Simon Broome

Abstract

This 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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Paper 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.

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Length: 34 pages
Date of creation: Aug 2003
Date of revision:
Handle: RePEc:may:mayecw:n1220803

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Article
- Simon Broome, 2005. "Limited Reserves and the Optimal Width of an Exchange Rate Target Zone," Open Economies Review, Springer, vol. 16(3), pages 263-281, July. [Downloadable!] (restricted)

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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Other versions:
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Other versions:
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Klein, Michael W, 1990. "Playing with the Band: Dynamic Effects of Target Zones in an Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(4), pages 757-72, November. [Downloadable!] (restricted)
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