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A target zone model with the terminal condition of joining a currency area

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  • Viktors Ajevskis

Abstract

This study aims to generalize the Krugman target zone model for the case of terminal condition of joining a currency area. Using the terminal condition and the 'smooth pasting conditions', both analytical and numerical solutions of the problem are obtained. The proposed model is more adequate than the Krugman one when the moment of joining currency area approaches. The properties of the model highlight that monetary authorities have some degree of monetary independence until the moment of entering a currency zone. The model's outcomes are consistent with dynamic properties of the exchange rate time series of the European countries that entered euro zone in January 1999.

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  • Viktors Ajevskis, 2011. "A target zone model with the terminal condition of joining a currency area," Applied Economics Letters, Taylor & Francis Journals, vol. 18(13), pages 1273-1278.
  • Handle: RePEc:taf:apeclt:v:18:y:2011:i:13:p:1273-1278
    DOI: 10.1080/13504851.2010.534053
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    References listed on IDEAS

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    1. E.O. Svensson, Lars, 1994. "Why exchange rate bands? : Monetary independence in spite of fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 157-199, February.
    2. Lundbergh, Stefan & Terasvirta, Timo, 2006. "A time series model for an exchange rate in a target zone with applications," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 579-609.
    3. Dumas, Bernard, 1991. "Super contact and related optimality conditions," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 675-685, October.
    4. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    5. Dixit, Avinash, 1991. "A simplified treatment of the theory of optimal regulation of Brownian motion," Journal of Economic Dynamics and Control, Elsevier, vol. 15(4), pages 657-673, October.
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    Cited by:

    1. Viktors Ajevskis, 2015. "An Exchange Rate Target Zone Model with a Terminal Condition and Mean-Reverting Fundamentals," Papers 1506.04880, arXiv.org.

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