The optimal degree of exchange rate flexibility: A target zone approach
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
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Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 06.22.Length: 34 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:pab:wpaper:06.22
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Keywords: Target zones; exchange rate agreements; monetary policy; time consistency.;Other versions of this item:
- Jes�s Rodríguez López & Hugo Rodríguez Mendizábal, 2007. "The Optimal Degree of Exchange Rate Flexibility: a Target Zone Approach," Review of International Economics, Wiley Blackwell, vol. 15(4), pages 803-822, 09.
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-23 (All new papers)
- NEP-CBA-2006-09-23 (Central Banking)
- NEP-FMK-2006-09-23 (Financial Markets)
- NEP-IFN-2006-09-23 (International Finance)
- NEP-MAC-2006-09-23 (Macroeconomics)
- NEP-MON-2006-09-23 (Monetary Economics)
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