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Optimal Target Zone and Stability Tradeoff
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- Authors
- Issue Date
- 2000-01
- Citation
- Seoul Journal of Economics, Vol.13 No.1, pp. 49-68
- Keywords
- target zone regime ; band width ; price stability
- Abstract
- Conventional literature on exchange rates largely ignores
normative issues of the target zone regime. This paper builds a
model for the optimal target zone and consider s whether the
target zone is desired compared to other exchange rate regimes.
The paper find s that when the central bank's objective is to
minimize the sum of price and output variances. a target zone
regime is superior to a fixed or floating exchange rate. In
determining the band width, a tradeoff exists between output
and price stability, with a wider band producing smaller output
variability and larger price variability.
- ISSN
- 1225-0279
- Language
- English
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