Working Paper: CEPR ID: DP5199
Authors: Marc Flandreau; John Komlos
Abstract: A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones. Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.
Keywords: Austria-Hungary; Covered Interest Parity; Credibility; Market Efficiency; Hypothesis; Monetary Model; Monetary Policy; Target Zone
JEL Codes: F31; N32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credibility of the monetary authorities (E58) | stability of the exchange rate within the target zone (F31) |
| interest differentials (E43) | expected rates of depreciation (E43) |
| market efficiency (G14) | success of the currency band (F33) |
| forward premium (G13) | actual exchange rate changes (F31) |
| credibility of the currency band (F33) | market participants' expectations aligning with authorities' interventions (E61) |