The Choice of Exchange Rate Bands: Balancing Credibility and Flexibility

45 Pages Posted: 10 Nov 1999

See all articles by Alex Cukierman

Alex Cukierman

Tel Aviv University - Eitan Berglas School of Economics; Interdisciplinary Center (IDC) Herzliyah; Centre for Economic Policy Research (CEPR)

Miguel A. Kiguel

Independent

Leonardo Leiderman

Tel Aviv University - Eitan Berglas School of Economics; Bank of Israel

Yossi Spiegel

Tel Aviv University, Coller School of Management; Centre for Economic Policy Research (CEPR); ZEW – Leibniz Centre for European Economic Research

Date Written: April 30, 1999

Abstract

This paper develops a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability, but value the flexibility to adjust the nominal exchange rate in order to attain real exchange rate objectives in the face of stochastic shocks to the current and capital accounts of the balance of payments. The paper features imperfect reputation about the limited commitment ability of policymakers. It provides an endogenous characterization of the optimal exchange rate band in terms of the underlying distribution of shocks and of the reputation of policymakers. The effects of the position of the exchange rate within the band, and those of other parameters, on the credibility of the band are also investigated.

JEL Classification: F31, F33

Suggested Citation

Cukierman, Alex and Kiguel, Miguel A. and Leiderman, Leonardo and Spiegel, Yossi, The Choice of Exchange Rate Bands: Balancing Credibility and Flexibility (April 30, 1999). Available at SSRN: https://ssrn.com/abstract=166148 or http://dx.doi.org/10.2139/ssrn.166148

Alex Cukierman

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 540 5360 (Phone)
+972 3 640 9908 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

HOME PAGE: http://www.tau.ac.il/~alexcuk/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Miguel A. Kiguel

Independent ( email )

No Address Available

Leonardo Leiderman

Tel Aviv University - Eitan Berglas School of Economics

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel

Bank of Israel

P.O. Box 780
Jerusalem, 91907
Israel

Yossi Spiegel (Contact Author)

Tel Aviv University, Coller School of Management ( email )

Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-9063 (Phone)
972-3-640-7739 (Fax)

HOME PAGE: http://www.tau.ac.il/~spiegel

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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