Target Zone Primer

Posted: 13 Jun 2007 Last revised: 31 Jan 2011

Rupert Macey-Dare

University of Oxford - Saint Cross College; Middle Temple; Minerva Chambers

Date Written: Summer 2007


This paper surveys methods and models used in the target zone literature. The following areas are covered: rationale for stochastic modelling; Ito's Lemma and stochastic differential equations; the basic target zone model; the flexible price monetary model; simple real exchange rate zones; sticky-price target zones; Uhlenbeck-Ornstein target zone model; empirical evidence on target zones; structural exchange rate models; purchasing power parity; expectations; government intervention policy; target zone realignments; learning and credibility; interest rate effects; linkages with other exchange rate phenomena; speculative attacks, stochastic process switching; rational bubbles; gold standard paradoxes and target zone optimization.

Keywords: exchange rate, target zone, zones, Ito, stochastic, purchasing power parity, expectations, intervention, realignment, learning, credibility, speculative attack, process switching, bubbles, gold standard paradox

JEL Classification: E43, E44, E47, F31, F47, G12, G15, G18

Suggested Citation

Macey-Dare, Rupert, Target Zone Primer (Summer 2007). Available at SSRN: or

Rupert Macey-Dare (Contact Author)

University of Oxford - Saint Cross College ( email )

Saint Giles
United Kingdom

Middle Temple

Middle Temple Lane
London, EC4Y 9AT
United Kingdom

Minerva Chambers

United Kingdom

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