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Inside the Impossible Triangle: Monetary Policy Autonomy in a Credible Target Zone

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Author Info
W. Jos Jansen (De Nederlandsche Bank)

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Abstract

This paper examines the trade-off between exchange rate stability and monetary autonomy for a target zone. Using the guilder-mark target zone in the pre-EMU period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder-mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade-off compared to the corner solutions (free float and monetary union), which is consistent with the ‘fear of floating’ phenomenon.

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Paper provided by EconWPA in its series Macroeconomics with number 0312009.

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Length: 18 pages
Date of creation: 24 Dec 2003
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Handle: RePEc:wpa:wuwpma:0312009

Note: Type of Document - pdf; prepared on PC Win98; to print on Deskjet, A4 paper; pages: 18; figures: within document
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Related research
Keywords: exchange rate regimes; monetary union; monetary autonomy; fear of floating; trilemma;

Other versions of this item:

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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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.:
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  3. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall. [Downloadable!] (restricted)
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  4. Martin Feldstein, 1998. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," NBER Working Papers 6150, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Ramana Ramaswamy & Torsten Slok, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan Journals, vol. 45(2), pages 6. [Downloadable!] (restricted)
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  6. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
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  7. Marcel Fratzscher, 2002. "The Euro bloc, the Dollar bloc and the Yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?," Working Paper Series 154, European Central Bank. [Downloadable!]
  8. Maurice Obstfeld., 1998. "EMU: Ready, or Not?," Center for International and Development Economics Research (CIDER) Working Papers C98-101, University of California at Berkeley.
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  9. Kumah, F.Y., 1996. "The effect of monetary policy on exchange rates : how to solve the puzzles," Discussion Paper 70, Tilburg University, Center for Economic Research. [Downloadable!]
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  11. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  12. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Wyplosz, Charles, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall. [Downloadable!] (restricted)
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  14. Garretsen, Harry & Swank, Job, 1998. "The Transmission of Interest Rate Changes and the Role of Bank Balance Sheets: A VAR-Analysis for the Netherlands," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 325-339, April. [Downloadable!] (restricted)
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  16. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," NBER Working Papers 10396, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  17. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February. [Downloadable!] (restricted)
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  18. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-18. [Downloadable!]
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Cited by:
(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. Forssbaeck, Jens & Oxelheim, Lars, 2005. "On the Link between Exchange-Rate Regimes and Monetary-Policy Autonomy: The European Experience," Working Paper Series 637, Research Institute of Industrial Economics. [Downloadable!]
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