On the Sustainability of Exchange Rate Target Zones with Central Parity Realignments

17 Pages Posted: 17 Jun 2015

See all articles by Enrique Martínez-García

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2015

Abstract

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

Martinez-Garcia, Enrique, On the Sustainability of Exchange Rate Target Zones with Central Parity Realignments (June 14, 2015). Available at SSRN: https://ssrn.com/abstract=2619389 or http://dx.doi.org/10.2139/ssrn.2619389

Enrique Martinez-Garcia (Contact Author)

Federal Reserve Bank of Dallas - Research Department ( email )

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