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

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  • W. Jos Jansen

    (De Nederlandsche Bank)

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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Bibliographic Info

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

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Length: 18 pages
Date of creation: 24 Dec 2003
Date of revision:
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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Web page: http://128.118.178.162

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Keywords: exchange rate regimes; monetary union; monetary autonomy; fear of floating; trilemma;

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  1. Fratzscher, Marcel, 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 0154, European Central Bank.
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  9. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
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  13. 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.
  14. 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.
  15. Martin Feldstein, 1997. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 23-42, Fall.
  16. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
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Cited by:
  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.

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