Exchange Rate Bands with Price Inertia
We formulate a stochastic, rational-expectations model of exchange rate determination, in which there are random shocks to the process of sluggish price adjustment. We examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates and describe the intervention policies needed to defend the bands in each case. We consider the possibility that commitment to defend a particular nominal band may be less than fully credible, and we analyse the implications of operating certain rules for realignment. We contrast our results with those which arise in the Krugman model of a nominal band.
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- Dornbusch, Rudiger, 1989.
" Real Exchange Rates and Macroeconomics: A Selective Survey,"
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- Dornbusch, Rudiger, 1987. "Exchange Rate Economics: 1986," Economic Journal, Royal Economic Society, vol. 97(385), pages 1-18, March.
- Rudiger Dornbusch, 1986. "Exchange Rate Economics: 1986," NBER Working Papers 2071, National Bureau of Economic Research, Inc.
- Bernard Dumas, 1989. "Super Contact and Related Optimality Conditions: A Supplement to AvinashDixits:"A Simplified Exposition of Some Results Concerning Regulated Brownian," NBER Technical Working Papers 0077, National Bureau of Economic Research, Inc.
- Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-648, August.
- Robert P. Flood & Peter M. Garber, 1989. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," NBER Working Papers 2918, National Bureau of Economic Research, Inc.
- Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc. Full references (including those not matched with items on IDEAS)
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