NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Target Zones with Limited Reserves

Paul Krugman, Julio Rotemberg

NBER Working Paper No. 3418
Issued in August 1990
NBER Program(s):   ITI   IFM

Like a fixed exchange rate, a target zone system may be subject to speculative attacks when the reserves of the central bank are limited. This

paper analyzes such speculative attacks and their implications; it shows that the recently developed "smooth pasting" model of target zones should be viewed as a special case that emerges only when reserves are sufficiently large. The paper then uses the target zone framework to resolve a seeming paradox in predicting speculative attacks on a gold standard, arguing that such a standard may best be viewed as the boundary between one-sided target zones.

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Document Object Identifier (DOI): 10.3386/w3418

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