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Exchange rate target zones

Driffill, John (2008) Exchange rate target zones. In: Durlauf, S.N. and Blume, L. (eds.) The New Palgrave Dictionary of Economics. Basingstoke, UK: Palgrave MacMillan. ISBN 9780333786765.

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Official URL: http://dx.doi.org/10.1057/9780230226203.0518

Abstract

A target zone attempts to limit the movement of an exchange rate, avoiding the pitfalls of both a pegged rate and a freely floating rate. The European Monetary System was the prime example. An elegant model of Paul Krugman demonstrates that in theory a target zone does indeed stabilize an exchange rate. But in practice it has been substantially rejected empirically. Williamson's ‘crawling bands’ around a ‘fundamental equilibrium exchange rate’ develop the concept. Target zones survive among candidates for membership of the Eurozone who take part in the Exchange Rate Mechanism mark II.

Item Type: Book Section
Keyword(s) / Subject(s): Bretton Woods System, Brownian motion, capital controls, Economic and Monetary Union (EMU), euro, European Monetary System, Exchange Rate Mechanism (EU), exchange rate target zone, fixed exchange rates, floating exchange rates, fundamental equilibrium exchange rate, inflation differentials, monetary theory of the exchange rate, nominal exchange rates, purchasing power parity, real exchange rates, uncovered interest parity, Wiener process
School or Research Centre: Birkbeck Schools and Research Centres > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
Depositing User: Administrator
Date Deposited: 01 Apr 2011 08:42
Last Modified: 17 Apr 2013 12:17
URI: http://eprints.bbk.ac.uk/id/eprint/1431

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