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Inside the Impossible Triangle:Monetary Policy Autonomy in a Credible Target Zone

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  • W. Jos Jansen

Abstract

This paper examines the trade-off between exchange rate stability and monetary autonomy for a target zone. Using the guilder-mark target zone in the pre-EMU period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder-mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade-off compared to the corner solutions (free float and monetary union), which is consistent with the 'fear of floating' phenomenon.

Suggested Citation

  • W. Jos Jansen, 2003. "Inside the Impossible Triangle:Monetary Policy Autonomy in a Credible Target Zone," MEB Series (discontinued) 2003-13, Netherlands Central Bank, Monetary and Economic Policy Department.
  • Handle: RePEc:dnb:mebser:2003-13
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    References listed on IDEAS

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    Cited by:

    1. Forssbaeck, Jens & Oxelheim, Lars, 2005. "On the Link between Exchange-Rate Regimes and Monetary-Policy Autonomy: The European Experience," Working Paper Series 637, Research Institute of Industrial Economics.

    More about this item

    Keywords

    exchange rate regime; monetary union; monetary autonomy; fear of floating; trilemma;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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