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Narrow Target Zones within Broad Zones: A Non-Speculative Exchange Rate Solution with Limited Resources

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  • Staffan Ringbom

Abstract

A smooth exchange rate target zone solution that internalizes the time inconsistency problem and is completely free from speculation incentives exists where the monetary resources available for an exchange rate defense are limited and the target zone collapses with probability one. In the unique closed form solution, a soft internal narrow target zone slides during a sterilized defense when the reserves change. For a smooth regime collapse the exchange rate is non-smoothpasted to the free-float. A target zone defended at its official borders is inherently speculative and results in a randomized regime collapse for the monetary intervention. Copyright Kluwer Academic Publishers 2003

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  • Staffan Ringbom, 2003. "Narrow Target Zones within Broad Zones: A Non-Speculative Exchange Rate Solution with Limited Resources," Open Economies Review, Springer, vol. 14(3), pages 319-341, July.
    • Handle: RePEc:kap:openec:v:14:y:2003:i:3:p:319-341
    DOI: 10.1023/A:1023991305350
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    Cited by:

    1. Lundbergh, Stefan & Terasvirta, Timo, 2006. "A time series model for an exchange rate in a target zone with applications," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 579-609.

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