2024-03-29T10:38:41Zhttp://digital.csic.es/dspace-oai/requestoai:digital.csic.es:10261/18252019-03-26T11:59:41Zcom_10261_58com_10261_7col_10261_689
DIGITAL.CSIC
author
Rodríguez Mendizábal, Hugo
author
Rodríguez-López, Jesús
2007-11-05T12:30:28Z
2007-11-05T12:30:28Z
2003-10-21
http://hdl.handle.net/10261/1825
This paper analyzes the linkages between the credibility of a target zone regime, the volatility of the exchange rate, and the width of the band where the exchange rate is allowed to fluctuate. These three concepts should be related since the band width induces a trade-off between credibility and volatility. Narrower bands should give less scope for the exchange rate to fluctuate but may make agents perceive a larger probability of realignment which by itself should increase the volatility of the exchange rate. We build a model where this trade-off is made explicit. The model is used to understand the reduction in volatility experienced by most EMS countries after their target zones were widened on August 1993. As a natural extension, the model also rationalizes the existence of non-official, implicit target zones (or fear of floating), suggested by some authors.
eng
openAccess
Fear of floating
Target zones
Exchange rate arrangements
Rational expectations, credibility
How tight should one's hands be tied? Fear of floating and credibility of exchange rate regimes
documento de trabajo
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URL
https://digital.csic.es/bitstream/10261/1825/1/59303.pdf
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URL
https://digital.csic.es/bitstream/10261/1825/4/59303.pdf.txt
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59303.pdf.txt