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The Burden of Intervention : Externalities in Multilateral Exchange Rates Arrangements

Author

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  • Marc Flandreau

    (Sciences Po - Sciences Po, Centre for Finance and Development - GRADUATE INSTITUTE OF INTERNATIONAL AND DEVELOPMENT STUDIES)

Abstract

In this paper, the author considers a multilateral target zone model that generalizes Krugman's model of a bilateral target zone. Parities are defended by manipulating money supplies in participating countries. This means that interventions aimed at one given exchange rate influence other exchange rates as well. As a result of these 'externalities' shocks on each fundamental affect the whole range of exchange rates involved. Moreover, intramarginal interventions arise endogenously, and the exchange rate distribution does not exhibit the u-shaped pattern which is typical of traditional target zones. Instead, his model gives rise to 'intramarginal targets' to which exchange rates tend to return. The location of these targets is shown to depend on the intervention-sterilization mix adopted by monetary authorities

Suggested Citation

  • Marc Flandreau, 1998. "The Burden of Intervention : Externalities in Multilateral Exchange Rates Arrangements," SciencePo Working papers Main hal-03416385, HAL.
    • Handle: RePEc:hal:spmain:hal-03416385
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03416385
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