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How Long Do Unilateral Target Zones Last?

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  • Dumas, B.
  • Svensson, L.E.O.

Abstract

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. Generally, 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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Suggested Citation

  • Dumas, B. & Svensson, L.E.O., 1994. "How Long Do Unilateral Target Zones Last?," DELTA Working Papers 94-06, DELTA (Ecole normale supérieure).
  • Handle: RePEc:del:abcdef:94-06
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    References listed on IDEAS

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    1. Delgado, Francisco & Dumas, Bernard, 1993. "Monetary contracting between central banks and the design of sustainable exchange-rate zones," Journal of International Economics, Elsevier, vol. 34(3-4), pages 201-224, May.
    2. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
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    6. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    7. Willem H. Buiter, 1989. "A Viable Gold Standard Requires Flexible Monetary and Fiscal Policy," Review of Economic Studies, Oxford University Press, vol. 56(1), pages 101-117.
    8. Flood, Robert P & Garber, Peter M, 1983. "A Model of Stochastic Process Switching," Econometrica, Econometric Society, vol. 51(3), pages 537-551, May.
    9. Lindbecg, H. Soderlind, P., 1992. "Target Zone Models and the Intervention Policy; The Swedish Case," Papers 496, Stockholm - International Economic Studies.
    10. Francisco Delgado & Bernard Dumas, "undated". "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.
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    Citations

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    Cited by:

    1. Antoine Magnier, 1992. "Théorie des zones cibles et fonctionnement du SME," Économie et Prévision, Programme National Persée, vol. 104(3), pages 87-113.
    2. Staffan Ringbom, 2003. "Narrow Target Zones within Broad Zones: A Non-Speculative Exchange Rate Solution with Limited Resources," Open Economies Review, Springer, vol. 14(3), pages 319-341, July.
    3. Simon Broome, 2003. "Limited Reserves and the Optimal Width of an Exchange Rate Target zone," Economics Department Working Paper Series n1220803, Department of Economics, National University of Ireland - Maynooth.
    4. Bartolini, Leonardo & Prati, Alessandro, 1999. "Soft exchange rate bands and speculative attacks: theory, and evidence from the ERM since August 1993," Journal of International Economics, Elsevier, vol. 49(1), pages 1-29, October.
    5. Simon Broome, 2005. "Limited Reserves and the Optimal Width of an Exchange Rate Target Zone," Open Economies Review, Springer, vol. 16(3), pages 263-281, July.
    6. Piersanti, Giovanni, 2012. "The Macroeconomic Theory of Exchange Rate Crises," OUP Catalogue, Oxford University Press, number 9780199653126.
    7. Pierre Siklos & Rod Tarajos, 1996. "Fundamentals and devaluation expectations in target zones: Some new evidence from the ERM," Open Economies Review, Springer, vol. 7(1), pages 35-59, January.
    8. Giancarlo Marini & Giovanni Piersanti, 2012. "Models of Speculative Attacks and Crashes in International Capital Markets," CEIS Research Paper 245, Tor Vergata University, CEIS, revised 24 Jul 2012.
    9. Broome, Simon, 2001. "The lifetime of a unilateral target zone: some extended results," Journal of International Money and Finance, Elsevier, vol. 20(3), pages 419-438, June.
    10. Hertrich, Markus, 2020. "Foreign exchange interventions under a one-sided target zone regime and the Swiss franc," Discussion Papers 21/2020, Deutsche Bundesbank.
    11. BESSEC Marie, 2010. "The Asymmetric Exchange Rate Dynamics in the EMS: a Time-Varying Threshold Test," EcoMod2003 330700015, EcoMod.
    12. Alessandro Prati & Massimo Sbracia, 2002. "Currency crises and uncertainty about fundamentals," Temi di discussione (Economic working papers) 446, Bank of Italy, Economic Research and International Relations Area.
    13. Lin, Hwan C., 2008. "Forward-rate target zones and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 831-846, September.
    14. Carrera, Jose M., 1999. "Speculative attacks to currency target zones: A market microstructure approach," Journal of Empirical Finance, Elsevier, vol. 6(5), pages 555-582, December.

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    More about this item

    JEL classification:

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

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