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Exchange Rate Bands With Price Inertia

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  • MILLER M.
  • WELLER, P.

Abstract

The authors formulate a stochastic rational-expectations model of exchange-rate determination in which there are random shocks to the process of sluggish price adjustment. They examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates, and describe the intervention policies needed to defend the bands in each case. The authors consider the possibility that the commitment to defend a particular nominal band may be less than fully credible and analyze the implications of operating certain rules for realignment. They contrast their results with those that arise in Paul Krugman's model of a nominal band. Copyright 1991 by Royal Economic Society.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Miller M. & Weller, P., 1990. "Exchange Rate Bands With Price Inertia," The Warwick Economics Research Paper Series (TWERPS) 337, University of Warwick, Department of Economics.
  • Handle: RePEc:wrk:warwec:337
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    File URL: https://www2.warwick.ac.uk/fac/soc/economics/research/workingpapers/1989-1994/twerp337.pdf
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    References listed on IDEAS

    as
    1. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 401-432.
    2. Miller, Marcus H & Weller, Paul, 1990. "Currency Bubbles Which Affect Fundamentals: A Qualitative Treatment," Economic Journal, Royal Economic Society, vol. 100(400), pages 170-179, Supplemen.
    3. Dornbusch, Rudiger, 1987. "Exchange Rate Economics: 1986," Economic Journal, Royal Economic Society, vol. 97(385), pages 1-18, March.
    4. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-648, August.
    5. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
    6. Froot, Kenneth A. & Obstfeld, Maurice, 1991. "Exchange-rate dynamics under stochastic regime shifts : A unified approach," Journal of International Economics, Elsevier, vol. 31(3-4), pages 203-229, November.
    7. Flood, Robert P & Garber, Peter M, 1983. "A Model of Stochastic Process Switching," Econometrica, Econometric Society, vol. 51(3), pages 537-551, May.
    8. Mussa, Michael, 1976. " The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy under a Regime of Controlled Floating," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 229-248.
    9. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    10. Bernard Dumas, 1989. "Super Contact and Related Optimality Conditions: A Supplement to AvinashDixits:"A Simplified Exposition of Some Results Concerning Regulated Brownian," NBER Technical Working Papers 0077, National Bureau of Economic Research, Inc.
    11. Robert P. Flood & Peter M. Garber, 1989. "The Linkage Between Speculative Attack and Target Zone Models of Exchange Rates," NBER Working Papers 2918, National Bureau of Economic Research, Inc.
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    Keywords

    exchange rate ; prices ; international economy;

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