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On the evolution of credibility and flexible exchange rate target zones
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Avesani, Renzo G., Gallo, Giampiero M. and Salmon, Mark H. (1999) On the evolution of credibility and flexible exchange rate target zones. Working Paper. University of Warwick: Warwick Business School Financial Econometrics Research Centre. Working Papers Series, Vol.1999 (No.11).
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Official URL: http://www2.warwick.ac.uk/fac/soc/wbs/research/wfr...
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) | ||||
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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 |
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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 | ||||
Official Date: | 31 October 1999 | ||||
Dates: |
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Volume: | Vol.1999 | ||||
Number: | No.11 | ||||
Status: | Not Peer Reviewed | ||||
Access rights to Published version: | Open Access (Creative Commons) | ||||
Grant number: | P96-6149-R (ACE) |
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