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.|
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- 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.
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NBER Working Papers
3919, National Bureau of Economic Research, Inc.
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IMF Working Papers
92/22, International Monetary Fund.
- 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.
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