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Target zones and exchange rate management: A stability analysis of the European Monetary System

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  • Andrew Hughes-Hallett
  • Patrick Minford

Abstract

Since the creation of the EMS in 1979 and the Louvre Accord in 1987, economists and policy makers have debated whether exchange rate management can actually secure better economic performance. This paper supplies some empirical evidence to help answer that question in the context of an environment free of unanticipated shocks. Our results identify the important design characteristics of a target zone or EMS type system focusing on the width of the bands, the length of time between realignments, and the choice of exchange rate parity. Secondly we examine the popular “conservation of variance” theory: that reducing exchange rate instability will just cause greater instability in the underlying monetary controls. Finally we produce evidence to support the claim that the method of exchange rate management is important because gross or persistent misalignments cause large welfare losses whereas moderate misalignments would impose only small costs. Work on the EMS relative robustness to shocks is under way. Copyright Kluwer Academic Publishers 1990

Suggested Citation

  • Andrew Hughes-Hallett & Patrick Minford, 1990. "Target zones and exchange rate management: A stability analysis of the European Monetary System," Open Economies Review, Springer, vol. 1(2), pages 175-200, June.
    • Handle: RePEc:kap:openec:v:1:y:1990:i:2:p:175-200
    DOI: 10.1007/BF01886164
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    References listed on IDEAS

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    Cited by:

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    2. Pompeo Della Posta, 2022. "The Revival of Target Zone Modeling," Open Economies Review, Springer, vol. 33(4), pages 775-805, September.

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