An exchange-rate system is a set of contracts which commits central banks to intervene in the foreign-exchange market. The design features of the system include: the rules of intervention, the limits placed on exchange rates and the "crisis scenario" which describes possible transitions to new regimes in case one central bank runs out of reserves or borrowing capacity. This paper considers the various trade-offs one faces in designing an exchange-rate system. Svensson (1989) has already analyzed the degree of variability in the exchange rate, the interest rate and the fundamentals. But the tradeoff also pertains to the amount of reserves which the central banks must have on hand in order to forestall a speculative attack and make the system sustainable. The amount of reserves needed depends crucially on the assured crisis scenario.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
3440.
Length: Date of creation: Sep 1990 Date of revision: Handle: RePEc:nbr:nberwo:3440
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Bertola, Giuseppe & Caballero, Ricardo J, 1992.
"Target Zones and Realignments,"
American Economic Review,
American Economic Association, vol. 82(3), pages 520-36, June.
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