Avesani, Renzo G., Gallo, Giampiero M. and Salmon, Mark H. (Mark Howard), 1949- (1999) On the evolution of credibility and flexible exchange rate target zones. Working Paper. Warwick Business School Financial Econometrics Research Centre, University of Warwick.

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Abstract

This paper considers the optimal management of exchange rate target zones by regarding the operation of a target zone as a dynamic signalling game between the monetary authorities and the financial markets. A Sequential Open Loop (Feedback) policy of sterilised intervention is proposed that depends critically on the evolution of the policy maker’s credibility as opposed to the open loop precommitment strategy that has been implemented, for instance, in the Exchange Rate Mechanism of the EMS and in the Bretton Woods system. The width of the target zone and re-alignments are in turn determined optimally given the policy maker’s credibility. This flexible target zone proposal is shown through simulation to stabilize the exchange rate to a substantial degree while retaining considerable flexibility and robustness in response to shocks.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Foreign exchange rates -- Econometric models, Stochastic models
Series Name:	Working Papers Series
Publisher:	Warwick Business School Financial Econometrics Research Centre
Place of Publication:	University of Warwick
Date:	31 October 1999
Volume:	Vol.1999
Number:	No.11
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Grant number:	P96-6149-R (ACE)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1838

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