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The burden of intervention: externalities in multilateral exchange rates arrangements

  • Flandreau, Marc

In this paper we consider a regime where several target zones coexist. Parities are defended by manipulating money supplies in participating countries. As a result, interventions aimed at one given exchange rate influence other exchange rates as well. Such ‘externalities’ are shown to have dramatic implications; shocks on each fundamental affect the whole range of exchange rates involved, intra-marginal interventions arise endogenously, and the exchange rate distribution does not exhibit the u-shaped pattern which is typical of traditional target zone models. Moreover, we compute the stationary distribution of exchange rates and fundamentals, and show that both are influenced by the ‘rules of the game’, i.e. currency used in interventions, sterilization procedures, etc.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 45 (1998)
Issue (Month): 1 (June)
Pages: 137-171

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Handle: RePEc:eee:inecon:v:45:y:1998:i:1:p:137-171
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  1. 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.
  2. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
  3. De Jong , F., 1991. "A Univariate Analysis of EMS Exchange Rates Using a Target Zone Model," Papers 9155, Tilburg - Center for Economic Research.
  4. Bekaert, Geert & Gray, Stephen F., 1998. "Target zones and exchange rates:: An empirical investigation," Journal of International Economics, Elsevier, vol. 45(1), pages 1-35, June.
  5. Lindberg, Hans & Soderlind, Paul, 1994. " Intervention Policy and Mean Reversion in Exchange Rate Target Zones: The Swedish Case," Scandinavian Journal of Economics, Wiley Blackwell, vol. 96(4), pages 499-513.
  6. Dominquez, Kathryn M. & Kenen, Peter B., 1992. "Intramarginal intervention in the EMS and the target-zone model of exchange-rate behavior," European Economic Review, Elsevier, vol. 36(8), pages 1523-1532, December.
  7. Bertola, G. & Cabarello, R.J., 1990. "Target Zones And Realignments," Discussion Papers 1990_51, Columbia University, Department of Economics.
  8. 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.
  9. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  10. Weber, Axel A, 1994. "Foreign Exchange Intervention and International Policy Coordination: Comparing the G-3 and EMS Experience," CEPR Discussion Papers 1038, C.E.P.R. Discussion Papers.
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