Exchange Rate Bands with Price Inertia
The authors formulate a stochastic rational-expectations model of exchange-rate determination in which there are random shocks to the process of sluggish price adjustment. They examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates, and describe the intervention policies needed to defend the bands in each case. The authors consider the possibility that the commitment to defend a particular nominal band may be less than fully credible and analyze the implications of operating certain rules for realignment. They contrast their results with those that arise in Paul Krugman's model of a nominal band. Copyright 1991 by Royal Economic Society.
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Volume (Year): 101 (1991)
Issue (Month): 409 (November)
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- Dornbusch, Rudiger, 1989.
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- Dornbusch, Rudiger, 1987. "Exchange Rate Economics: 1986," Economic Journal, Royal Economic Society, vol. 97(385), pages 1-18, March.
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- Bernard Dumas, 1989. "Super Contact and Related Optimality Conditions: A Supplement to AvinashDixits:"A Simplified Exposition of Some Results Concerning Regulated Brownian," NBER Technical Working Papers 0077, National Bureau of Economic Research, Inc.
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- Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
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