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Target Zone Models with Price Inertia: Solutions and Testable Implications

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  • Sutherland, Alan

Abstract

Many recent papers suggest that the basic flex-price target zone model does not perform well empirically. This paper investigates the testable implications of a sticky-price target zone model and finds that, to a limited extent, it has a better empirical performance than the simplest flex-price model. However, in terms of nominal variables, the sticky-price model is found to be observationally equivalent to the flex-price model when the latter is extended to include intramarginal intervention and realignments. Copyright 1994 by Royal Economic Society.

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  • Sutherland, Alan, 1994. "Target Zone Models with Price Inertia: Solutions and Testable Implications," Economic Journal, Royal Economic Society, vol. 104(422), pages 96-112, January.
  • Handle: RePEc:ecj:econjl:v:104:y:1994:i:422:p:96-112
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    Citations

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    Cited by:

    1. Robert Amano & Richard Black & Marcel Kasumovich, 1997. "A Band-Aid Solution to Inflation Targeting," Staff Working Papers 97-11, Bank of Canada.
    2. Dean Corbae & Christopher J. Neely & Paul A. Weller, 1998. "Endogenous realignments and the sustainability of a target," Working Papers 1994-009, Federal Reserve Bank of St. Louis.
    3. Bernd Kempa & Michael Nelles, 1999. "Misalignments of real exchange rates and the credibility of nominal currency bands," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(4), pages 613-628, December.
    4. Peter Carr & Zura Kakushadze, 2015. "FX Options in Target Zone," Papers 1512.01527, arXiv.org, revised Jul 2016.
    5. Kempa, Bernd & Nelles, Michael & Pierdzioch, Christian, 1997. "An analytical approximation of target zone exchange rate functions: the technique of collocation," Economics Letters, Elsevier, vol. 57(3), pages 339-343, December.
    6. Kempa, Bernd & Nelles, Michael & Pierdzioch, Christian, 1999. "The term structure of interest rates in a sticky-price target zone model," Journal of International Money and Finance, Elsevier, vol. 18(5), pages 817-834, October.
    7. Kempa, Bernd & Nelles, Michael, 1998. "On the Viability of Exchange Rate Target Zones in a Mundell-Fleming Model with Stochastic Output Shocks," Journal of Policy Modeling, Elsevier, vol. 20(5), pages 603-619, October.
    8. Dai, Meixing, 1998. "Les effets stabilisants de la zone-cible du taux d’inflation
      [The stabilising effects of inflation-targeting zone]
      ," MPRA Paper 13856, University Library of Munich, Germany, revised Nov 2001.
    9. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2013. "Exchange Rate Target Zones: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 247-268, April.
    10. International Monetary Fund, 1999. "Switzerland; Selected Issues and Statistical Appendix," IMF Staff Country Reports 99/30, International Monetary Fund.

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