On the Choice of an Exchange Regime: Target Zones Revisited

Jesús Rodríguez-López () and Hugo Rodriguez Mendizabal

No E2002/10, Economic Working Papers at Centro de Estudios Andaluces from Centro de Estudios Andaluces

Abstract: From the classical gold standard up to the current ERM2 arrangement of the European Union, target zones have been a widely used exchange regime in contemporary history. This paper presents a benchmark model that rationalizes the choice of target zones over the rest of regimes: the fixed rate, the free float and the managed float. It is shown that the monetary authority may gain efficiency by reducing volatility of both the exchange rate and the interest rate at the same time. Furthermore, the model is consistent with some known stylised facts in the empirical literature that previous models were not able to produce, namely, the positive relation between the exchange rate and the interest rate differential, the degree of non-linearity of the function linking the exchange rate to fundamentals and the shape of the exchange rate stochastic distribution.

Keywords: Infrastructures; taxes; efficiency; social welfare (search for similar items in EconPapers)
JEL-codes: E52 F31 F33 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2002
New Economics Papers: this item is included in nep-cba, nep-fin, nep-ifn and nep-rmg
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Citations: View citations in EconPapers (4)

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