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Target zone dynamics where the fundamental follows a SDE with periodic forcing

Listed author(s):
  • Dibeh, Ghassan

This paper investigates exchange rate and reserves dynamics in a target zone where the fundamental follows a stochastic differential equation with a periodic forcing function. Solutions to the model show that the target zone plays a stabilizing role but the dynamics of the exchange rate follow a family of S-shaped functions as time evolves. This dynamics cause the width of the target zone to be a varying function of time. It becomes what we can call a flexible target zone. The monetary authorities are then forced to hold not only large reserves but also varying reserves in order to properly defend the target zone.

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File URL: http://www.sciencedirect.com/science/article/pii/S0378437105008459
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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 363 (2006)
Issue (Month): 2 ()
Pages: 437-445

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Handle: RePEc:eee:phsmap:v:363:y:2006:i:2:p:437-445
DOI: 10.1016/j.physa.2005.08.013
Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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  9. Fella, Giulio, 2001. "Reserve uncertainty and speculative attacks on target zones," Economics Letters, Elsevier, vol. 70(2), pages 223-228, February.
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