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A Guide to Target Zones

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  • Jacob A. Frenkel
  • Morris Goldstein

Abstract

This paper identifies key issues surrounding the advisability and practicality of adopting "target zones" for the exchange rates of major currencies. Pour fundamental questions concerning the definition of and the rationale for target zones are addressed: first, what is generally meant by a "target zone" approach to exchange rate management and how can "hard" and "soft" versions of this approach be defined; second, what are the perceived deficiencies in the existing exchange rate system of managed floating which motivate the call for the adoption of target zones; third, how might target zones remedy these deficiencies; and fourth, what factors are behind much of the skepticism over and opposition to target zones? In addition, the paper deals with a series of operational questions of a more technical nature that weigh heavily on the practicality of implementing a target zone approach. The issues discussed include the following: how would the target zones be calculated; what currencies would be included in the system of target zones; how wide should the target zones be and how frequently should they be revised; and what policy instruments would be employed to keep actual exchange rates within the target zones, and with what consequences for other policy objectives? The purpose of the paper is not to make the case either for or against the adoption of target zones. Rather, the intention is to raise and discuss factors that should be considered in any serious discussion of the topic.

Suggested Citation

  • Jacob A. Frenkel & Morris Goldstein, 1986. "A Guide to Target Zones," NBER Working Papers 2113, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2113
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    File URL: http://www.nber.org/papers/w2113.pdf
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    1. Jeffrey R. Shafer & Bonnie E. Loopesko, 1983. "Floating Exchange Rates after Ten years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 1-86.
    2. Frenkel, Jacob A., 1981. "The collapse of purchasing power parities during the 1970's," European Economic Review, Elsevier, vol. 16(1), pages 145-165.
    3. Jacques R. Artus & John H. Young, 1979. "Fixed and Flexible Rates: A Renewal of The Debate," NBER Working Papers 0367, National Bureau of Economic Research, Inc.
    4. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    5. Michael C. Deppler & Duncan M. Ripley, 1978. "The World Trade Model: Merchandise Trade," IMF Staff Papers, Palgrave Macmillan, vol. 25(1), pages 147-206, March.
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    Cited by:

    1. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers 4/00, Monash University, Department of Econometrics and Business Statistics.
    2. Saarenheimo, Tuomas, 1995. "The equilibrium exchange rate for the Finnish Markka," Research Discussion Papers 29/1995, Bank of Finland.
    3. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2014. "The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate," Open Economies Review, Springer, vol. 25(2), pages 311-336, April.
    4. Rudiger Dornbusch & Jeffrey A. Frankel, 1987. "The Flexible Exchange Rate System: Experience and Alternatives," NBER Working Papers 2464, National Bureau of Economic Research, Inc.
    5. Giannellis, Nikolaos & Papadopoulos, Athanasios P., 2011. "What causes exchange rate volatility? Evidence from selected EMU members and candidates for EMU membership countries," Journal of International Money and Finance, Elsevier, vol. 30(1), pages 39-61, February.
    6. Dominquez, Kathryn M. & Kenen, Peter B., 1992. "Intramarginal intervention in the EMS and the target-zone model of exchange-rate behavior," European Economic Review, Elsevier, vol. 36(8), pages 1523-1532, December.
    7. Vajanne, Laura, . "The Exchange Rate Under Target Zones," ETLA A, The Research Institute of the Finnish Economy, number 16.
    8. Jacob A. Frenkel & Morris Goldstein & Paul R. Masson, 2017. "The Rationale for, and Effects of, International Economic Policy Coordination," World Scientific Book Chapters,in: TRADE CURRENCIES AND FINANCE, chapter 7, pages 241-298 World Scientific Publishing Co. Pte. Ltd..
    9. Jacob A. Frenkel & Morris Goldstein, 1988. "The International Monetary System: Developments and Prospects," NBER Working Papers 2648, National Bureau of Economic Research, Inc.
    10. Cruz-Rodríguez, Alexis, 2015. "Tipo de cambio real en la República Dominicana: Enfoques alternativos de equilibrio y desalineamiento
      [Real exchange rate in the Dominican Republic: Alternative approaches to equilibrium and misali
      ," MPRA Paper 70943, University Library of Munich, Germany.

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