Advanced Search
MyIDEAS: Login

The optimal degree of exchange rate flexibility: A target zone approach

Contents:

Author Info

  • Jesús Rodríguez López

    ()
    (Department of Economics, Universidad Pablo de Olavide)

  • Hugo Rodríguez Mendizábal

    ()
    (Department of Economics, Universidad Autónoma de Barcelona)

Abstract

This paper presents a benchmark model that rationalizes the choice of the degree of exchange rate flexibility. We show that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylized facts in the empirical literature on target zones that previous models were not able to generate jointly, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.upo.es/serv/bib/wps/econ0622.pdf
File Function: First version, 2006
Download Restriction: no

Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 06.22.

as in new window
Length: 34 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:pab:wpaper:06.22

Contact details of provider:
Postal: Carretera de Utrera km.1, 41013 Sevilla
Phone: + 34 954 34 8913
Fax: + 34 954 34 9339
Email:
Web page: http://www.upo.es/econ/
More information through EDIRC

Related research

Keywords: Target zones; exchange rate agreements; monetary policy; time consistency.;

Other versions of this item:

Find related papers by JEL classification:

References

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.:
as in new window
  1. Giuseppe Bertola & Lars E.O. Svensson, 1991. "Stochastic Devaluation Risk and the Empirical Fit of Target Zone Models," NBER Working Papers 3576, National Bureau of Economic Research, Inc.
  2. Maurice Obstfeld & Kenneth Rogoff, 1995. "The mirage of fixed exchange rates," Working Papers in Applied Economic Theory 95-08, Federal Reserve Bank of San Francisco.
  3. David Hargreaves, 2003. "Monetary policy and the volatility of real exchange rates in New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 66, pages 2, September.
  4. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2009. "Time-Varying Risk, Interest Rates, and Exchange Rates in General Equilibrium," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 851-878.
  5. Meese, Richard A & Rose, Andrew K, 1990. "Nonlinear, Nonparametric, Nonessential Exchange Rate Estimation," American Economic Review, American Economic Association, vol. 80(2), pages 192-96, May.
  6. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Research Paper Series 32, Quantitative Finance Research Centre, University of Technology, Sydney.
  7. Kenneth D. West, 2004. "Monetary Policy and the Volatility of Real Exchange Rates in New Zealand," NBER Working Papers 10280, National Bureau of Economic Research, Inc.
  8. Jesús Crespo-Cuaresma & Balázs Égert & Ronald MacDonald, 2005. "Non-Linear Exchange Rate Dynamics in Target Zones: A Bumpy Road Towards A Honeymoon Some Evidence from the ERM, ERM2 and Selected New EU Member States," William Davidson Institute Working Papers Series wp771, William Davidson Institute at the University of Michigan.
  9. Giavazzi, Francesco & Pagano, Marco, 1988. "The advantage of tying one's hands : EMS discipline and Central Bank credibility," European Economic Review, Elsevier, vol. 32(5), pages 1055-1075, June.
  10. Svensson, L.E.O., 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," Papers 521, Stockholm - International Economic Studies.
  11. Geert Bekaert & Stephen F. Gray, 1999. "Target Zones and Exchange Rates: An Empirical Investigation," NBER Working Papers 5445, National Bureau of Economic Research, Inc.
  12. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-36, June.
  13. Krugman, P. & Miller, M., 1992. "Why Have a Target Zone?," The Warwick Economics Research Paper Series (TWERPS) 394, University of Warwick, Department of Economics.
  14. Laurence Ball, 1998. "Policy Rules for Open Economies," NBER Working Papers 6760, National Bureau of Economic Research, Inc.
  15. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Stochastic Process Switching: Some Simple Solutions," Econometrica, Econometric Society, vol. 59(1), pages 241-50, January.
  16. 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.
  17. Vilasuso Jon & Cunningham Steve, 1996. "Tests for Nonlinearity in EMS Exchange Rates," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 1(3), pages 1-16, October.
  18. Robert P. Flood & Andrew K. Rose & Donald J. Mathieson, 1990. "An Empirical Exploration of Exchange Rate Target-Zones," NBER Working Papers 3543, National Bureau of Economic Research, Inc.
  19. 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.
  20. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  21. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August.
  22. Rodríguez-López Jesús & Rodriguez Mendizabal Hugo, 2006. "How Tight Should One's Hands be Tied? Fear of Floating and the Credibility of Exchange Rate Regimes," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(1), pages 1-25, March.
  23. Lars E.O. Svensson, 1993. "Fixed Exchange Rates as a Means to Price Stability: What Have We Learned," NBER Working Papers 4504, National Bureau of Economic Research, Inc.
  24. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 499-513.
  25. De Jong , F., 1991. "A Univariate Analysis of EMS Exchange Rates Using a Target Zone Model," Papers 9155, Tilburg - Center for Economic Research.
  26. Bekaert, Geert, 1994. "Exchange rate volatility and deviations from unbiasedness in a cash-in-advance model," Journal of International Economics, Elsevier, vol. 36(1-2), pages 29-52, February.
  27. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  28. Ayuso, Juan & Restoy, Fernando, 1996. "Interest rate parity and foreign exchange risk premia in the ERM," Journal of International Money and Finance, Elsevier, vol. 15(3), pages 369-382, June.
  29. Michael Woodford, 2001. "Inflation Stabilization and Welfare," NBER Working Papers 8071, National Bureau of Economic Research, Inc.
  30. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  31. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  32. Reinhart, Carmen, 2000. "The mirage of floating exchange rates," MPRA Paper 13736, University Library of Munich, Germany.
  33. Lars E.O. Svensson, 1990. "The Term Structure of Interest Rate Differentials in a Target Zone: Theory and Swedish Data," NBER Working Papers 3374, National Bureau of Economic Research, Inc.
  34. Detken, Carsten & Gaspar, Vítor, 2003. "Maintaining price stability under free-floating: a fearless way out of the corner?," Working Paper Series 0241, European Central Bank.
  35. Jong, F.C.J.M. de, 1994. "A univariate analysis of EMS exchange rates using a target zone model," Open Access publications from Tilburg University urn:nbn:nl:ui:12-384515, Tilburg University.
  36. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers 4/00, Monash University, Department of Econometrics and Business Statistics.
  37. Lewis, Karen K, 1995. "Occasional Interventions to Target Rates," American Economic Review, American Economic Association, vol. 85(4), pages 691-715, September.
  38. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  39. Taylor, Mark P. & Iannizzotto, Matteo, 2001. "On the mean-reverting properties of target zone exchange rates: a cautionary note," Economics Letters, Elsevier, vol. 71(1), pages 117-129, April.
  40. Iannizzotto, Matteo & Taylor, Mark P, 1999. "The Target Zone Model, Non-linearity and Mean Reversion: Is the Honeymoon Really Over?," Economic Journal, Royal Economic Society, vol. 109(454), pages C96-110, March.
  41. repec:rus:hseeco:181565 is not listed on IDEAS
  42. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:pab:wpaper:06.22. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publicación Digital - UPO).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.