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Target Zones with Limited Reserves

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Author Info
Paul Krugman
Julio Rotemberg

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Abstract

Like a fixed exchange rate, a target zone system may be subject to speculative attacks when the reserves of the central bank are limited. This paper analyzes such speculative attacks and their implications; it shows that the recently developed "smooth pasting" model of target zones should be viewed as a special case that emerges only when reserves are sufficiently large. The paper then uses the target zone framework to resolve a seeming paradox in predicting speculative attacks on a gold standard, arguing that such a standard may best be viewed as the boundary between one-sided target zones.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3418.

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Date of creation: Aug 1990
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Handle: RePEc:nbr:nberwo:3418

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert P. Flood & Peter M. Garber, 1983. "A Model of Stochastic Process Switching," NBER Working Papers 0626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August. [Downloadable!] (restricted)
  3. Svensson, L.E.O., 1989. "Target Zones And Interest Rate Variability," Papers 457, Stockholm - International Economic Studies.
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  4. Miller, Marcus & Weller, Paul, 1989. "Solving Stochastic Saddlepoint Systems: A Qualitative Treatment with Economic Applications," CEPR Discussion Papers 308, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. Robert P. Flood & Peter M. Garber, 1989. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," NBER Working Papers 2918, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Froot, Kenneth & Obstfeld, Maurice, 1991. "Exchange Rate Dynamics Under Stochastic Regime Shifts: A Unified Approach," CEPR Discussion Papers 522, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  7. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Svensson, L.E.O., 1990. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," Papers 466, Stockholm - International Economic Studies.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Canale, Rosaria Rita, 1998. "Monetary "integralism" and fiscal policy dependence in the European Monetary Union. Some reflections," MPRA Paper 1429, University Library of Munich, Germany. [Downloadable!]
  2. Barry Eichengreen & Peter Garber, 1990. "Before the Accord: U.S. Monetary-Financial Policy 1945-51," NBER Working Papers 3380, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Lars E.O. Svensson, 1990. "The Foreign Exchange Risk Premium in a Target Zone with Devaluation Risk," NBER Working Papers 3466, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Lars E.O. Svensson, 1991. "Target Zones and Interest Rate Variability," NBER Working Papers 3218, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Pierre Siklos & Rod Tarajos, 1996. "Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM," Open Economies Review, Springer, vol. 7(1), pages 35-59, January. [Downloadable!] (restricted)
  6. Shankar, Rashmi, 2005. "Insurance and liquidity : panel evidence," Policy Research Working Paper Series 3648, The World Bank. [Downloadable!]
  7. Willem H. Buiter & Paolo A. Pesenti, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," NBER Working Papers 3467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Bernard Dumas & Lars E.O. Svensson, 1994. "How Long do Unilateral Target Zones Last?," NBER Working Papers 3931, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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