On the Sustainability of Exchange Rate Target Zones with Central Parity Realignments
17 Pages Posted: 17 Jun 2015
Date Written: June 14, 2015
I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler's ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.
Keywords: Nominal Exchange Rate, Target Zones, Discrete Intervention, Central Parity Realignment, Imperfect Credibility
JEL Classification: E58, F31, F33, F41, G15
Suggested Citation: Suggested Citation