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An Interpretation of Recent Research on Exchange Rate Target Zones

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  • Lars E. O. Svensson

Abstract

How do exchange rate bands work compared to completely fixed rates (between realignments); or, more precisely, what are the dynamics of exchange rates, interest rates, and central bank interventions within exchange rate bands? Does the difference between bands and completely fixed exchange rates matter, and if so, which of the two arrangements is best; or, more precisely, what are the tradeoffs that determine the optimal bandwidth? This article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones, with emphasis on main ideas and results and without technical detail.

Suggested Citation

  • 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.
  • Handle: RePEc:aea:jecper:v:6:y:1992:i:4:p:119-44
    Note: DOI: 10.1257/jep.6.4.119
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.6.4.119
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    References listed on IDEAS

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    1. Robert P. Flood & Peter M. Garber, 1991. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1367-1372.
    2. Miller, Marcus & Weller, Paul, 1991. "Exchange Rate Bands with Price Inertia," Economic Journal, Royal Economic Society, vol. 101(409), pages 1380-1399, November.
    3. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
    4. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    5. Genberg, Hans, 1989. " Exchange Rate Management and Macroeconomic Policy: A National Perspective," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 439-469.
    6. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    7. Bertola, Giuseppe & Caballero, Ricardo, 1991. "Sustainable Intervention Policies and Exchange Rate Dynamics," CEPR Discussion Papers 504, C.E.P.R. Discussion Papers.
    8. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    9. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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