Posted: 21 Jul 2007 Last revised: 31 Jan 2011
Date Written: Summer 2007
This paper reviews some of the policy considerations behind modern target zone theory, pre-EMU. Topics covered include: domestic output boosting and switching; insulation and transmission of macroeconomic shocks; relationship with other exchange rate regimes; optimal currency areas; "rules versus discretion" and anti-inflationary discipline; reputation and signalling; international policy co-ordination and convergence; economic signal extraction; domestic behavioural change mechanisms and Lucas-critique arguments; use of the exchange rate as a nominal anchor; excess exchange rate volatility; target zones, speculation and contagious speculative attacks; credibility and realignment expectations; the Walters critique and Soros' approach; exchange rate bubble bursting potential; equilibrium exchange rates and "FEERS", various exchange rate blueprints and assignment rules including Williamson and Miller's "Revised Blueprint" and Boughton's "Reverse Assignment"; Bretton Woods, Louvre Accord and EMS/ERM experience.
Keywords: exchange rate, target zone, EMS, ERM, EMU
JEL Classification: E43, E44, E47, F31, F47, G12, G15, G18
Suggested Citation: Suggested Citation