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Playing with the Band: Dynamic Effects of Target Zones in an Open Economy

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  • Klein, Michael W

Abstract

This paper applies techniques of regulated Brownian motion to a model of a small open economy to investigate how bands on fundamental driving variables affect the realization of the nominal exchange rate, the real exchange rate, prices, and output. The author shows that these bands mitigate the relationship between exogenous fundamentals and endogenous variables through their effects on expectations. He also considers the effects of changing the width of the band and finds greater stabilization of endogenous variables with more narrow bands on exogenous fundamentals. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Klein, Michael W, 1990. "Playing with the Band: Dynamic Effects of Target Zones in an Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(4), pages 757-772, November.
    • Handle: RePEc:ier:iecrev:v:31:y:1990:i:4:p:757-72
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    Cited by:

    1. Simon Broome, 2003. "Limited Reserves and the Optimal Width of an Exchange Rate Target zone," Economics Department Working Paper Series n1220803, Department of Economics, National University of Ireland - Maynooth.
    2. Simon Broome, 2005. "Limited Reserves and the Optimal Width of an Exchange Rate Target Zone," Open Economies Review, Springer, vol. 16(3), pages 263-281, July.
    3. Buiter, Willem H. & Pesenti, Paolo A., 1990. "Rational Speculative Bubbles In An Exchange Rate Target Zone," Economic Research Papers 268490, University of Warwick - Department of Economics.
    4. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
    5. Beetsma, Roel M. W. J. & van der Ploeg, Frederick, 1998. "Macroeconomic stabilization and intervention policy under an exchange rate band," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 339-353, April.
    6. 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.
    7. Froot, Kenneth A & Obstfeld, Maurice, 1991. "Stochastic Process Switching: Some Simple Solutions," Econometrica, Econometric Society, vol. 59(1), pages 241-250, January.
    8. Fang, Chung-rou & Lai, Ching-chong, 2002. "Targeting nominal income versus targeting price level: A target zone perspective," International Review of Economics & Finance, Elsevier, vol. 11(3), pages 229-249.
    9. Patrick Artus & Claude Jessua, 1996. "La spéculation," Revue Économique, Programme National Persée, vol. 47(3), pages 409-424.
    10. Chen, Li-Ju & Ye, Chusheng & Hu, Shih-Wen & Wang, Vey & Wen, Jiandong, 2013. "The Effect of a Target Zone on the Stabilization of Agricultural Prices and Farmers' Nominal Income," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 38(1), pages 1-14, April.
    11. Chen, Li-Ju & Hu, Shih-Wen & Wang, Vey & Wen, Jiandong & Ye, Chusheng, 2014. "The effects of purchasing and price subsidy policies for agricultural products under target zones," Economic Modelling, Elsevier, vol. 43(C), pages 439-447.
    12. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
    13. Ikeda, Shinsuke & Shibata, Akihisa, 1995. "Fundamentals uncertainty, bubbles, and exchange rate dynamics," Journal of International Economics, Elsevier, vol. 38(3-4), pages 199-222, May.
    14. Araújo, Aloísio Pessoa de & Feijó Filho, Cypriano Lopes, 1994. "Bandas de cambio : teoria, evidencia empirica e sua possivel aplicação no Brasil," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 234, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    15. Zhen Zhu, 1997. "Dynamic Inconsistency and Exchange-Rate Target Zones: A Welfare Analysis," International Economic Journal, Taylor & Francis Journals, vol. 11(1), pages 15-38.

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