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When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies

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  • A.J. Hallet

Abstract

With the European Exchange Rate Mechanism, the Louvre Accord and the Bretton Woods system, policy makers have tried to use exchange rate targeting as a means of improving economic performance. However, while initially successful, all three regimes eventually collapsed. This paper asks what makes target zones work? We show that coordination can be achieved by having all countries play a noncooperative game in which each has to take account of some of the aims of others in addition to their own. If policies are built around exchange rate targeting, this means the target path should be a projected equilibrium exchange rate, updated and amended to include the latest information on realisations of foreign as well as domestic targets. That would provide the necessary conditions for induced coordination. They are not sufficient for successful targeting however, since there is no guarantee that the coordination will be strong enough for the gains to be distributed in an incentive compatible way. Copyright Kluwer Academic Publishers 1998

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  • A.J. Hallet, 1998. "When Do Target Zones Work? An Examination of Exchange Rate Targeting as a Device for Coordinating Economic Policies," Open Economies Review, Springer, vol. 9(2), pages 115-138, April.
    • Handle: RePEc:kap:openec:v:9:y:1998:i:2:p:115-138
    DOI: 10.1023/A:1008238117440
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    Cited by:

    1. Creel, Jerome & Capoen, Fabrice & Cussy, Pascal & Lenoble-Liaud, Helene, 2003. "How to manage financial shocks: Intra-European vs. international monetary coordination," Journal of Macroeconomics, Elsevier, vol. 25(4), pages 431-455, December.
    2. repec:hal:wpspec:info:hdl:2441/2978 is not listed on IDEAS
    3. Andrew Hughes Hallett & Diana N. Weymark, 2002. "Government Leadership and Central Bank Design," Vanderbilt University Department of Economics Working Papers 0208, Vanderbilt University Department of Economics, revised Dec 2004.
    4. repec:hal:spmain:info:hdl:2441/2978 is not listed on IDEAS
    5. Fabrice Capoen & Jérôme Creel & Pascal Cussy & Hélène Lenoble-Liaud, 2000. "How to manage speculative shocks : intra-european vs. international monetary coordination," Working Papers hal-03458449, HAL.
    6. Fabrice Capoen & Jérôme Creel, 2007. "Efficiency of stability-oriented institutions: the European case," SciencePo Working papers Main hal-03461990, HAL.
    7. repec:spo:wpmain:info:hdl:2441/2977 is not listed on IDEAS
    8. Andrew Hughes Hallett & Diana N. Weymark, 2007. "Fiscal leadership and central bank design," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 607-627, May.
    9. repec:spo:wpecon:info:hdl:2441/2978 is not listed on IDEAS
    10. Hughes Hallett, Andrew, 2005. "In Praise of Fiscal Restraint and Debt Rules. What the Euro Zone Might Do Now," CEPR Discussion Papers 5043, C.E.P.R. Discussion Papers.
    11. repec:hal:wpspec:info:hdl:2441/2977 is not listed on IDEAS
    12. repec:spo:wpmain:info:hdl:2441/2978 is not listed on IDEAS
    13. Andrew Hughes Hallett, 2004. "Post-Thatcher Fiscal Strategies in the U.K.: An Interpretation," CESifo Working Paper Series 1372, CESifo.
    14. repec:spo:wpecon:info:hdl:2441/2977 is not listed on IDEAS
    15. repec:hal:spmain:info:hdl:2441/2977 is not listed on IDEAS

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