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On the sustainability of exchange rate target zones with central parity realignments

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  • Martínez-García, Enrique

Abstract

I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler’s ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.

Suggested Citation

  • Martínez-García, Enrique, 2015. "On the sustainability of exchange rate target zones with central parity realignments," Economics Letters, Elsevier, vol. 134(C), pages 86-89.
    • Handle: RePEc:eee:ecolet:v:134:y:2015:i:c:p:86-89
    DOI: 10.1016/j.econlet.2015.06.018
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    More about this item

    Keywords

    Nominal exchange rate; Target zones; Discrete intervention; Central parity realignment; Imperfect credibility;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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