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Target Zones and Realignment Expectations: The Israeli and Mexican Experience

Author

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  • Alejandro M. Werner

Abstract

This paper studies the Mexican and Israeli experience with a target zone. The first part of the paper develops a model of exchange rate determination under a target zone regime with stochastic realignments, and examines the conditions under which the adoption of the target zone, instead of a fixed exchange rate, reduces the volatility of the interest rate differential. We conclude that if the variance of the expected realignment is sufficiently large, then the target zone will be useful. The second part of the paper is an empirical study that shows that the target zone regime helped reduce interest rate variability in Israel and Mexico by absorbing part of the shocks to the expected realignment with movements of the exchange rate inside the band.

Suggested Citation

  • Alejandro M. Werner, 1995. "Target Zones and Realignment Expectations: The Israeli and Mexican Experience," IMF Working Papers 1995/114, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1995/114
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    Cited by:

    1. Ribeiro de Castro, Claudia, 1999. "Inside and Outside the Band Exchange Rate Fluctuations for Brazil," LIDAM Discussion Papers IRES 2000004, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).

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