Working Paper: CEPR ID: DP645
Authors: Bernard Dumas; Lars E. O. Svensson
Abstract: We examine the expected survival time of a unilateral exchange rate target zone, when constraints on monetary policy prevent the central bank from exclusively focusing on defending the target zone. In general, the width of the target zone has a negligible effect on the expected survival time, and the dominant determinants are reserve levels and the degree of real and monetary divergence between the country in question and the rest of the world. For seemingly realistic parameters, the expected survival time is fairly long: a few decades rather than a few years.
Keywords: exchange rates; interventions; reserves
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reserve levels (E58) | survival time (C41) |
| critical reserve levels (E52) | survival time (C41) |
| reserve depletion (Q31) | target zone collapse (E32) |
| width of target zone (F55) | survival time (C41) |
| real and monetary divergence (E49) | survival time (C41) |