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Evaluating the Extended Target Zones Proposal for the G3

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  • Currie, David
  • Wren-Lewis, Simon

Abstract

This paper evaluates the extended target zone proposal of Williamson and Miller using the National Institute world economic model (GEM). Williamson and Miller's proposals envisage that real exchange rates will be controlled by movements in relative interest rates, that fiscal policy will be used to steer nominal demand towards a target which depends on capacity utilization, inflation and the current balance, and that the average level of world interest rates will be used to control global nominal demand. We evaluate the performance of these rules for the United States, Germany and Japan over the period 1975-84, using control methods to determine the best choice of parameters in the feedback rules. We then consider how history would have differed from actual events had such rules been in place. The results suggest that such rules would have led to a significant improvement in economic performance: exchange rate variability would have been reduced and the dramatic increase in United States interest rates which took place after 1980 would have been avoided.

Suggested Citation

  • Currie, David & Wren-Lewis, Simon, 1988. "Evaluating the Extended Target Zones Proposal for the G3," CEPR Discussion Papers 221, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:221
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    Cited by:

    1. Guglielmo Caporale & Michael Chui & Stephen Hall & Brian Henry, 2003. "Evaluating the Gains to Cooperation in the G-3," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(4), pages 337-356, December.
    2. Michael Artis, 1993. "The Role of the Exchange Rate in Monetary Policy - the Experience of Other Countries," RBA Annual Conference Volume (Discontinued), in: Adrian Blundell-Wignall (ed.),The Exchange Rate, International Trade and the Balance of Payments, Reserve Bank of Australia.
    3. Miller, M. & Weller, P. & Williamson, J., 1989. "The Stabilizing Properties Of Target Zones," The Warwick Economics Research Paper Series (TWERPS) 318, University of Warwick, Department of Economics.
    4. Gerardo Esquivel & Felipe Larrain B., 2002. "The Impact of G-3 Exchange Rate Volatility on Developing Countries," CID Working Papers 86, Center for International Development at Harvard University.
    5. Nicos Christodoulakis & Anthony Garratt & Paul Levine, 1995. "Simple Rules, Robustness and Alternative Assignments for G3 Policy Cooperation," The World Economy, Wiley Blackwell, vol. 18(1), pages 137-159, January.
    6. Barrell, Ray & Dury, Karen & Hurst, Ian, 2003. "International monetary policy coordination: an evaluation using a large econometric model," Economic Modelling, Elsevier, vol. 20(3), pages 507-527, May.
    7. Peter Mooslechner & Martin Schuerz, 1999. "International Macroeconomic Policy Coordination: Any Lessons for EMU? A Selective Survey of the Literature," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 26(3), pages 171-199, September.

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