Target Zone Primer
Posted: 13 Jun 2007 Last revised: 31 Jan 2011
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: Suggested Citation