UNSPECIFIED (1996) Optimal target zones: How an exchange rate mechanism can improve upon discretion. JOURNAL OF ECONOMIC DYNAMICS & CONTROL, 20 (9-10). pp. 1641-1660. ISSN 0165-1889

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Abstract

Using Krugman's (1991) target zone model, we find an explicit, subgame-perfect solution for a central bank wishing to stabilise the exchange rate given proportional costs of intervention, We demonstrate, however, that precommitment to narrower bands would yield a welfare gain - which provides a theoretical rationale for an Exchange Rate Mechanism (ERM). Numerical simulations suggest that the optimal currency band with precommitment via an ERM is only half as wide as that under discretion, and that the welfare benefits are sufficient to sustain the system.

Item Type:	Journal Article
Subjects:	H Social Sciences > HC Economic History and Conditions
Journal or Publication Title:	JOURNAL OF ECONOMIC DYNAMICS & CONTROL
Publisher:	ELSEVIER SCIENCE BV
ISSN:	0165-1889
Date:	September 1996
Volume:	20
Number:	9-10
Number of Pages:	20
Page Range:	pp. 1641-1660
Publication Status:	Published
URI:	http://wrap.warwick.ac.uk/id/eprint/18307

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