TY  - JOUR
AU  - Krugman,Paul R.
TI  - Target Zones and Exchange Rate Dynamics
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 2481
PY  - 1988
Y2  - 1988
UR  - http://www.nber.org/papers/w2481
L1  - http://www.nber.org/papers/w2481.pdf
N1  - Author contact info:
Paul R. Krugman
Department of Economics
Princeton University
Woodrow Wilson School
Princeton, NJ  08544
Tel: 609/258-4570
Fax: 609/258-2809
E-Mail: pkrugman@princeton.edu
AB  - This paper develops a highly simplified model of exchange rate behavior within the band under a target zone regime. It shows that the expectation that authorities will defend the band exerts a stabilizing effect on exchange rate behavior within the band, even when the authorities are not actively intervening. The extent of stabilization can be related in a straightforward way to three factors: the sensitivity of the current exchange rate to expected depreciation, the volatility of the process driving exchange rate "fundamentals", and the credibility of the commitment by authorities to defend the target zone.
ER  -