Working Paper: NBER ID: w2918
Authors: Robert P. Flood; Peter K. Garber
Abstract: In this paper we generalize the target zone exchange rate as model formalized by Krugman (1988b) to include finite-sized interventions in defense of the zone. The main contributions of these pages consist of linking the recent developments in the theory of target zones to the mirror-image theory of speculative attacks on asset price fixing regimes and in using aspects of that linkage to give an intuitive interpretation to the smooth pasting" condition usually invoked as a terminal condition.
Keywords: Speculative Attack; Target Zone; Exchange Rates
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipation of boundary interactions (F55) | speculative behavior in currency markets (F31) |
| policy decisions aimed at defending the target zone (E61) | speculative attacks (D84) |
| anticipation of boundary interactions (F55) | nonlinear behaviors in exchange rate dynamics (F31) |
| implementation of finite-sized interventions (C90) | behavior of exchange rates within a target zone (F31) |