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Target Zones and Exchange Rate Dynamics


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  • Paul R. Krugman


This paper develops a highly simplified model of exchange rate behavior within the band under a target zone regime. It shows that the expectation that authorities will defend the band exerts a stabilizing effect on exchange rate behavior within the band, even when the authorities are not actively intervening. The extent of stabilization can be related in a straightforward way to three factors: the sensitivity of the current exchange rate to expected depreciation, the volatility of the process driving exchange rate "fundamentals", and the credibility of the commitment by authorities to defend the target zone.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2481.

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Date of creation: Jan 1988
Date of revision:
Publication status: published as Quarterly Journal of Economics, Vol. 106, no. 3 (1991): 669-682.
Handle: RePEc:nbr:nberwo:2481

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  1. Robert P. Flood & Peter M. Garber, 1982. "A model of stochastic process switching," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 201, Board of Governors of the Federal Reserve System (U.S.).
  2. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 11(1), pages 9-57, January.
  3. Paul R. Krugman, 1987. "Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets," NBER Working Papers 2459, National Bureau of Economic Research, Inc.
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Blog mentions

As found by, the blog aggregator for Economics research:
  1. Krugman on blogs
    by UDADISI in udadisi on 2011-10-19 13:42:00
  2. Krugman on the Econoblogosphere
    by UDADISI in udadisi on 2012-01-18 01:39:00
  3. Open Science And The Econoblogosphere
    by Paul Krugman in The Conscience of a Liberal on 2012-01-17 16:30:00
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