Currency Bands, Target Zones, and Cash Limits: Thresholds for Monetary and Fiscal Policy

February 1, 1990

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those which emerge from a simple monetary model subject to velocity shocks. The effects of a realignment of the Band, and of fiscal policy used in conjunction with monetary policy to defend the band, are also examined.

Subject: Currencies, Exchange rates, Foreign exchange, Managed exchange rates, Monetary base, Money, Real exchange rates

Keywords: cash limit, commitments of the EMS, Currencies, currency band, exchange rate commitment, Exchange rates, full employment, Global, Managed exchange rates, Monetary base, monetary policy, money stock, price level, Real exchange rates, WP

Pages:
42
Volume:
1990
DOI:
https://doi.org/10.5089/9781451928853.001
Issue:
006
Series:
Working Paper No. 1990/006
Stock No:
WPIEA0061990
ISBN:
9781451928853
ISSN:
1018-5941

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Notes

Also published in Staff Papers, Vol. 38, No. 1, March 1991.

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