Optimal target zone and stability tradeoff

Conventional literature on exchange rates largely ignores normative issues of the target zone regime. This paper builds a model for the optimal target zone and considers whether the target zone is desired compared to other exchange rate regimes. The paper finds that when the central bank's obje...

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Bibliographic Details
Published inSeoul journal of economics Vol. 13; no. 1; p. 49
Main Author Chan-Woo, Jeong
Format Journal Article
LanguageEnglish
Published Seoul Institute of Economic Research 01.04.2000
Subjects
Central banks
Credibility
Economic stabilization
Equilibrium
Fixed exchange rates
Floating exchange rates
Foreign exchange markets
Foreign exchange rates
Interest rates
Intervention
Monetary policy
Normal distribution
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Summary:Conventional literature on exchange rates largely ignores normative issues of the target zone regime. This paper builds a model for the optimal target zone and considers whether the target zone is desired compared to other exchange rate regimes. The paper finds that when the central bank's objective is to minimize the sum of price and output variances, a target zone regime is superior to a fixed or floating exchange rate. In determining the band width, a tradeoff exists between output and price stability, with a wider band producing smaller output variability and larger price variability.
ISSN:1225-0279