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Target Zone Models with Price Inertia: Some Testable Implications

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  • Sutherland, Alan

Abstract

Many recent papers suggest that the basic flex-price target zone model does not perform well empirically. This paper derives some of the testable implications of a sticky-price target zone model in order to determine whether the assumption of perfect price flexibility explains the empirical failure of the basic model. I find that while price inertia does introduce mean reversion into the exchange rate, the behaviour of nominal variables is otherwise not qualitatively different from the flex-price model. The paper therefore concludes that the flex-price assumption is not an adequate explanation for empirical failure of the target zone basic model.

Suggested Citation

  • Sutherland, Alan, 1992. "Target Zone Models with Price Inertia: Some Testable Implications," CEPR Discussion Papers 698, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:698
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    References listed on IDEAS

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    1. Gabor Oblath & David Tarr, 2017. "The Terms-of-Trade Effects from the Elimination of State Trading in Soviet-Hungarian Trade," World Scientific Book Chapters,in: Trade Policies for Development and Transition, chapter 13, pages 295-313 World Scientific Publishing Co. Pte. Ltd..
    2. Dani Rodrik, 1994. "Foreign Trade in Eastern Europe's Transition: Early Results," NBER Chapters,in: The Transition in Eastern Europe, Volume 2: Restructuring, pages 319-356 National Bureau of Economic Research, Inc.
    3. Peter B. Kenen, 1991. "Transitional Arrangements for Trade and Payments among the CMEA Countries," IMF Staff Papers, Palgrave Macmillan, vol. 38(2), pages 235-267, June.
    4. Landesmann, Michael & Székely, Istvan P., 1991. "Industrial Restructuring and the Reorientation of Trade in Czechoslovakia, Hungary and Poland," CEPR Discussion Papers 546, C.E.P.R. Discussion Papers.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Exchange Rates; Price Inertia; Target Zones;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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