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Inside the Impossible Triangle: Monetary Policy Autonomy in a Credible Target Zone

Listed author(s):
  • W. Jos Jansen

    (De Nederlandsche Bank)

This paper examines the trade-off between exchange rate stability and monetary autonomy for a target zone. Using the guilder-mark target zone in the pre-EMU period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder-mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade-off compared to the corner solutions (free float and monetary union), which is consistent with the ‘fear of floating’ phenomenon.

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File URL: http://econwpa.repec.org/eps/mac/papers/0312/0312009.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0312009.

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Length: 18 pages
Date of creation: 24 Dec 2003
Handle: RePEc:wpa:wuwpma:0312009
Note: Type of Document - pdf; prepared on PC Win98; to print on Deskjet, A4 paper; pages: 18; figures: within document
Contact details of provider: Web page: http://econwpa.repec.org

References listed on IDEAS
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  1. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  2. Charles Wyplosz, 1997. "EMU: Why and How It Might Happen," Journal of Economic Perspectives, American Economic Association, vol. 11(4), pages 3-21, Fall.
  3. Maurice Obstfeld, 1999. "EMU: Ready, or Not?," NBER Working Papers 6682, National Bureau of Economic Research, Inc.
  4. Lars E.O. Svensson, 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," NBER Working Papers 4207, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  6. Fank Smets, 1997. "Measuring Monetary Policy Shocks in France, Germany and Italy: The Role of The Exchange Rate," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 133(III), pages 597-616, September.
  7. Butter, Frank A.G. den & Mosch, Robert H.J., 2001. "the Dutch miracle: institutions, networks and trust," Serie Research Memoranda 0018, VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics.
  8. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," FRB Atlanta Working Paper 94-2, Federal Reserve Bank of Atlanta.
  9. Ramana Ramaswamy & Torsten Sløk, 1998. "The Real Effects of Monetary Policy in the European Union: What Are the Differences?," IMF Staff Papers, Palgrave Macmillan, vol. 45(2), pages 374-396, June.
  10. Maurice Obstfeld & Jay Shambaugh & Alan Taylor, 2004. "The Trilemma in History: Tradeoffs among Exchange Rates, Monetary Policies, and Capital Mobility," International Finance 0407003, EconWPA.
  11. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  12. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, Oxford University Press, vol. 117(2), pages 379-408.
  13. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc.
  14. Garretsen, Harry & Swank, Job, 1998. "The Transmission of Interest Rate Changes and the Role of Bank Balance Sheets: A VAR-Analysis for the Netherlands," Journal of Macroeconomics, Elsevier, vol. 20(2), pages 325-339, April.
  15. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
  16. Martin Feldstein, 1998. "The Political Economy of the European Economic and Monetary Union: Political Sources of an Economic Liability," NBER Working Papers 6150, National Bureau of Economic Research, Inc.
  17. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  18. Fratzscher, Marcel, 2002. "The Euro bloc, the Dollar bloc and the Yen bloc: how much monetary policy independence can exchange rate flexibility buy in an interdependent world?," Working Paper Series 0154, European Central Bank.
  19. Anil K. Kashyap & Jeremy C. Stein, 1997. "The role of banks in monetary policy: a survey with implications for the European Monetary Union," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 2-18.
  20. Kumah, F.Y., 1996. "The Effect of Monetary Policy on Exchange Rates : How to Solve the Puzzles," Discussion Paper 1996-70, Tilburg University, Center for Economic Research.
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