The Operation and Collapse of Fixed Exchange Rate Regimes
The paper reviews the recent literature on exchange rate target zones and on speculative attacks on fixed exchange rates. The influential Krugman model of exchange rate target zones has two main results, namely that credible target zones stabilize exchange rates more than fundamentals (the `honeymoon effect') and that exchange rates depend on fundamentals according to a nonlinear `S-curve' with `smooth pasting.' Almost all the model's empirical implications have been overwhelmingly rejected. Later research has reconciled the theory with empirical results by allowing for imperfectly credible exchange rates and for intra-marginal central bank interventions. That research has also shown that non-linearities and smooth pasting are probably empirically insignificant and that a linear managed-float model is a good approximation to exchange rate target zones. The speculative attack literature has developed models built on the principles of no anticipated price discontinuities, endogenous timing of the speculative attack, and the attack occurring when a finite amount of foreign exchange reserves remain. These models have been extended to include random timing of attacks and alternative post attack regimes. Some empirical tests have been undertaken. In contrast to target zone models, speculative attack models have been influenced by empirical results only to a small extent.
|Date of creation:||Dec 1994|
|Date of revision:|
|Publication status:||published as Garber, Peter M. & Svensson, Lars E.O., 1995. "The operation and collapse of fixed exchange rate regimes," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 36, pages 1865-1911 Elsevier.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bacchetta, Philippe, 1990. "Temporary capital controls in a balance-of- payments crisis," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 246-257, September.
- Bartolini, Leonardo & Bodnar, Gordon M., 1992.
"Target zones and forward rates in a model with repeated realignments,"
Journal of Monetary Economics,
Elsevier, vol. 30(3), pages 373-408, December.
- Gordon M. Bodnar & Leonardo Bartolini, 1992. "Target Zones and Forward Rates in a Model with Repeated Realignments," IMF Working Papers 92/22, International Monetary Fund.
- Pierre-Richard Agenor & Jagdeep S. Bhandari & Robert P. Flood, 1991.
"Speculative Attacks and Models of Balance-of-Payments Crises,"
NBER Working Papers
3919, National Bureau of Economic Research, Inc.
- Robert P. Flood & Jagdeep S. Bhandari & Pierre-Richard AgÃ©nor, 1991. "Speculative Attacks and Models of Balance of Payments Crises," IMF Working Papers 91/99, International Monetary Fund.
- Pierre-Richard AgÃ©nor & Jagdeep S. Bhandari & Robert P. Flood, 1992. "Speculative Attacks and Models of Balance of Payments Crises," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 357-394, June.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:4971. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.