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How Long Do Unilateral Target Zones Last?

  • Dumas, Bernard J
  • Svensson, Lars E O

We examine the expected survival time of a unilateral exchange rate target zone, when constraints on monetary policy prevent the central bank from exclusively focusing on defending the target zone. In general, the width of the target zone has a negligible effect on the expected survival time, and the dominant determinants are reserve levels and the degree of real and monetary divergence between the country in question and the rest of the world. For seemingly realistic parameters, the expected survival time is fairly long: a few decades rather than a few years.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 645.

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Date of creation: May 1992
Date of revision:
Handle: RePEc:cpr:ceprdp:645
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  1. Robert P. Flood & Peter M. Garber, 1981. "A Model of Stochastic Process Switching," NBER Working Papers 0626, National Bureau of Economic Research, Inc.
  2. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
  3. Francisco Delgado & Bernard Dumas, 1990. "Monetary Contracting Between Central Banks and the Design of SustainableExchange-Rate Zones," NBER Working Papers 3440, National Bureau of Economic Research, Inc.
  4. Buiter, Willem H. & Grilli, Vittorio, 1989. "The `Gold Standard Paradox' and Its Resolution," CEPR Discussion Papers 361, C.E.P.R. Discussion Papers.
  5. Delgado, F. & Dumas, B., 1990. "Monetary Contracting Between Central Banks And The Design Of Sustainable Exchange-Rate Zones," Weiss Center Working Papers 20-90, Wharton School - Weiss Center for International Financial Research.
  6. Svensson, Lars E O, 1990. "Target Zones and Interest Rate Variability," CEPR Discussion Papers 372, C.E.P.R. Discussion Papers.
  7. Lindbecg, H. Soderlind, P., 1992. "Target Zone Models and the Intervention Policy; The Swedish Case," Papers 496, Stockholm - International Economic Studies.
  8. Buiter, Willem H, 1989. "A Viable Gold Standard Requires Flexible Monetary and Fiscal Policy," Review of Economic Studies, Wiley Blackwell, vol. 56(1), pages 101-17, January.
  9. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  10. Francisco Delgado & Bernard Dumas, . "Monetary Contracting between Central Banks and the Design of Sustainable Exchange-Rate Zones (Reprint 035)," Rodney L. White Center for Financial Research Working Papers 20-90, Wharton School Rodney L. White Center for Financial Research.
  11. Paul Krugman & Julio Rotemberg, 1990. "Target Zones with Limited Reserves," NBER Working Papers 3418, National Bureau of Economic Research, Inc.
  12. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
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