Use this identifier to quote or link this document: http://hdl.handle.net/2072/1931

On the choice of an exchange rate regime: target zones revisited
Rodríguez López, Jesús; Rodríguez Mendizábal, Hugo
Universitat Autònoma de Barcelona. Unitat de Fonaments de l'Anàlisi Econòmica; Institut d'Anàlisi Econòmica
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 stylized 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 exchage rate to fundamentals and the shape of the exchange rate stochastic distribution.
2006-05-09
Política monetària -- Unió Europea, Països de la
Canvi exterior -- Models economètrics
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Working Paper
Working papers; 518.02
         

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