Monetary Contracting between Central Banks and the Design of Sustainableexchange-Rate Zones

32 Pages Posted: 27 Jun 2007

See all articles by Bernard Dumas

Bernard Dumas

INSEAD; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: September 1990

Abstract

An exchange-rate system is a set of contracts which commits central banks to intervene in the foreign-exchange market. The design features of the system include: the rules of intervention, the limits placed on exchange rates and the "crisis scenario" which describes possible transitions to new regimes in case one central bank runs out of reserves or borrowing capacity. This paper considers the various trade-offs one faces in designing an exchange-rate system. Svensson (1989) has already analyzed the degree of variability in the exchange rate, the interest rate and the fundamentals. But the tradeoff also pertains to the amount of reserves which the central banks must have on hand in order to forestall a speculative attack and make the system sustainable. The amount of reserves needed depends crucially on the assured crisis scenario.

Suggested Citation

Dumas, Bernard, Monetary Contracting between Central Banks and the Design of Sustainableexchange-Rate Zones (September 1990). NBER Working Paper No. w3440. Available at SSRN: https://ssrn.com/abstract=987257

Bernard Dumas

INSEAD ( email )

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HOME PAGE: http://www.insead.fr/~dumas/

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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