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Inside The Impossible Triangle: Monetary Policy Autonomy In A Credible Target Zone

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  • W. JOS JANSEN

Abstract

This paper examines the trade‐off between exchange rate stability and monetary autonomy for a target zone. Using the guilder‐mark target zone in the pre‐Economic and Monetary Union period as a case study, we empirically estimate how much policy discretion the Dutch central bank still enjoyed and how much had been ceded to the German central bank. The sum of these two measures is an estimate of the policy autonomy under a free float. We find that the narrow guilder‐mark target zone still permitted a modest degree of policy independence. This result suggests that intermediate exchange rate regimes may offer an attractive trade‐off compared to the corner solutions (free float and monetary union), which is consistent with the “fear of floating” phenomenon. (JEL E52, F33, F41, F42)

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  • W. Jos Jansen, 2008. "Inside The Impossible Triangle: Monetary Policy Autonomy In A Credible Target Zone," Contemporary Economic Policy, Western Economic Association International, vol. 26(2), pages 216-228, April.
    • Handle: RePEc:bla:coecpo:v:26:y:2008:i:2:p:216-228
    DOI: 10.1111/j.1465-7287.2007.00093.x
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    2. Chee-Hong Law, 2023. "The Impacts of International Reserves on Monetary Independence in Emerging Countries: An Asymmetric Analysis," Global Journal of Emerging Market Economies, Emerging Markets Forum, vol. 15(1), pages 53-71, January.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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