Stabilization Policy with Bands

May 1, 1990

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Format: Chicago

Daniel Gros. Stabilization Policy with Bands, (USA: International Monetary Fund, 1990) accessed December 26, 2024

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

This paper discusses stabilization policy in the presence of bands for the exchange rate. The bands are modelled in a probabilistic sense: monetary policy has to be such as to keep the probability, that the exchange rate stays within the bands, above a certain threshold. In contrast to other models of target zones, this formulation leads to a linear decision rule and implies sizeable intra-marginal interventions, which corresponds to the experience in the EMS. The extent to which short-run monetary policy is constraint by the bands depends on its own long-run components and on fiscal policy.

Subject: Exchange rates, Fiscal policy, Foreign exchange, Managed exchange rates, National accounts, Personal income, Purchasing power parity

Keywords: Exchange rate, Exchange rate band, Exchange rate commitment, Exchange rate fluctuation, Exchange rate target, Exchange rate variability, Exchange rates, Income elasticity, Managed exchange rates, Personal income, Policy goal, Price level, Purchasing power parity, Stabilization policy, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1990/049
Stock No:

WPIEA0491990
ISBN:

9781451971644
ISSN:

1018-5941

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