Target Zones with Limited Reserves

38 Pages Posted: 13 Jul 2000 Last revised: 2 Aug 2008

See all articles by Paul R. Krugman

Paul R. Krugman

Princeton University - Woodrow Wilson School of Public and International Affairs; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased); National Bureau of Economic Research (NBER) (deceased)

Date Written: August 1990

Abstract

Like a fixed exchange rate, a target zone system may be subject to speculative attacks when the reserves of the central bank are limited. Thispaper analyzes such speculative attacks and their implications; it shows that the recently developed "smooth pasting" model of target zones should be viewed as a special case that emerges only when reserves are sufficiently large. The paper then uses the target zone framework to resolve a seeming paradox in predicting speculative attacks on a gold standard, arguing that such a standard may best be viewed as the boundary between one-sided target zones.

Suggested Citation

Krugman, Paul R. and Rotemberg, Julio J., Target Zones with Limited Reserves (August 1990). NBER Working Paper No. w3418. Available at SSRN: https://ssrn.com/abstract=226682

Paul R. Krugman (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States
609-258-4570 (Phone)
609-258-2809 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Julio J. Rotemberg

Harvard University, Business, Government and the International Economy Unit (deceased) ( email )

Cambridge, MA
United States
617-495-1015 (Phone)
617-496-5994 (Fax)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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