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Choosing the Width of Exchange Rate Bands - Credibility vs. Flexibility


  • Cukierman, Alex
  • Leiderman, Leonardo
  • Spiegel, Yossi


The purpose of this paper is to provide a framework for the analysis of policy-makers' choices regarding unilateral exchange rate bands. Exchange rate bands are viewed as the outcome of an optimization problem by a policy-maker whose objective function weighs the level of the real exchange rate against the level and variability of the real exchange rate. The analysis endogenizes policy decisions about realignments and about the width of the band. Conditions are developed for the case in which optimal band width widens in response to a decrease in policy-makers' commitment reputation, an increase in the cost of reneging on the existing band, and an increase in the variance of fundamental shocks.

Suggested Citation

  • Cukierman, Alex & Leiderman, Leonardo & Spiegel, Yossi, 1994. "Choosing the Width of Exchange Rate Bands - Credibility vs. Flexibility," CEPR Discussion Papers 907, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:907

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    References listed on IDEAS

    1. repec:fth:prinin:300 is not listed on IDEAS
    2. Coles, Melvyn G & Smith, Eric, 1996. "Cross-Section Estimation of the Matching Function: Evidence from England and Wales," Economica, London School of Economics and Political Science, vol. 63(252), pages 589-597, November.
    3. David Card, 1992. "Using Regional Variation in Wages to Measure the Effects of the Federal Minimum Wage," ILR Review, Cornell University, ILR School, vol. 46(1), pages 22-37, October.
    4. Berman, Eli, 1997. "Help Wanted, Job Needed: Estimates of a Matching Function from Employment Service Data," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages 251-292, January.
    5. Lucas, Robert Jr. & Prescott, Edward C., 1974. "Equilibrium search and unemployment," Journal of Economic Theory, Elsevier, vol. 7(2), pages 188-209, February.
    6. Martin Chalkley, 1991. "Monopsony Wage Determination and Multiple Unemployment Equilibria in a Non-Linear Search Model," Review of Economic Studies, Oxford University Press, vol. 58(1), pages 181-193.
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    Cited by:

    1. Cukierman, A., 1996. "Targeting Monetary Aggregates and Inflation in Europe," Papers 37-96, Tel Aviv.
    2. Daniel Laskar, 1997. ""Incohérence temporelle" de la politique monétaire optimale. Un argument en faveur des zones cibles," Revue Économique, Programme National Persée, vol. 48(1), pages 5-22.
    3. Chen, Yu-Fu & Funke, Michael & Glanemann, Nicole, 2009. "A Soft Edge Target Zone Model: Theory And Application To Hong Kong," SIRE Discussion Papers 2009-61, Scottish Institute for Research in Economics (SIRE).
    4. Sachs, Jeffrey & Tornell, Aaron & Velasco, Andres, 1996. "The Mexican peso crisis: Sudden death or death foretold?," Journal of International Economics, Elsevier, vol. 41(3-4), pages 265-283, November.
    5. Andres Velasco, 1996. "When Are Fixed Exchange Rates Really Fixed?," NBER Working Papers 5842, National Bureau of Economic Research, Inc.
    6. Velasco, Andres, 1997. "When are fixed exchange rates really fixed?," Journal of Development Economics, Elsevier, vol. 54(1), pages 5-25, October.
    7. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, vol. 40(3-5), pages 1023-1035, April.

    More about this item


    Commitment; Credibility; Exchange Rates; Realignments;

    JEL classification:

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


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