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When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies

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  • A.J. Hallet

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Abstract

With the European Exchange Rate Mechanism, the Louvre Accord and the Bretton Woods system, policy makers have tried to use exchange rate targeting as a means of improving economic performance. However, while initially successful, all three regimes eventually collapsed. This paper asks what makes target zones work? We show that coordination can be achieved by having all countries play a noncooperative game in which each has to take account of some of the aims of others in addition to their own. If policies are built around exchange rate targeting, this means the target path should be a projected equilibrium exchange rate, updated and amended to include the latest information on realisations of foreign as well as domestic targets. That would provide the necessary conditions for induced coordination. They are not sufficient for successful targeting however, since there is no guarantee that the coordination will be strong enough for the gains to be distributed in an incentive compatible way. Copyright Kluwer Academic Publishers 1998

Suggested Citation

  • A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, vol. 9(2), pages 115-138, April.
  • Handle: RePEc:kap:openec:v:9:y:1998:i:2:p:115-138
    DOI: 10.1023/A:1008238117440
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    References listed on IDEAS

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    Cited by:

    1. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
    2. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Vanderbilt University Department of Economics Working Papers 0208, Vanderbilt University Department of Economics, revised Dec 2004.
    3. Fabrice Capoen & Jérôme Creel, 2007. "Efficiency of stability-oriented institutions: the European case," Sciences Po publications N°2007-06, Sciences Po.
    4. Fabrice Capoen & Jérôme Creel & Pascal Cussy & Hélène Lenoble-Liaud, 2000. "How to manage speculative shocks : intra-european vs. international monetary coordination," Sciences Po publications N° 2000-01, Sciences Po.
    5. Andrew Hughes Hallett, 2004. "Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation," CESifo Working Paper Series 1372, CESifo Group Munich.
    6. Creel, Jerome & Capoen, Fabrice & Cussy, Pascal & Lenoble-Liaud, Helene, 2003. "How to manage financial shocks: Intra-European vs. international monetary coordination," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 431-455, December.
    7. repec:spo:wpecon:info:hdl:2441/2978 is not listed on IDEAS

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