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Stabilization Policy with Bands

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  • Daniel Gros

Abstract

This paper discusses stabilization policy in the presence of bands for the exchange rate. The bands are modelled in a probabilistic sense: monetary policy has to be such as to keep the probability, that the exchange rate stays within the bands, above a certain threshold. In contrast to other models of target zones, this formulation leads to a linear decision rule and implies sizeable intra-marginal interventions, which corresponds to the experience in the EMS. The extent to which short-run monetary policy is constraint by the bands depends on its own long-run components and on fiscal policy.

Suggested Citation

  • Daniel Gros, 1990. "Stabilization Policy with Bands," IMF Working Papers 90/49, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:90/49
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    Cited by:

    1. E.O. Svensson, Lars, 1994. "Why exchange rate bands? : Monetary independence in spite of fixed exchange rates," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 157-199, February.

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