Exchange Rate Bands with Price Inertia

We formulate a stochastic rational-expectations model of exchange rate determination in which there are random shocks to the process of sluggish price adjustment. We examine the effects of imposing limits upon the range of variation of both nominal and real exchange rates, and describe the intervention policies needed to defend the bands in each case. We consider the possibility that commitment to defend a particular nominal band may be less than fully credible, and analyze the implications of operating certain rules for realignment. We contrast our results with those which arise in the Krugman model of a nominal band.


Issue Date:
Feb 02 1990
Publication Type:
Working or Discussion Paper
Record Identifier:
http://ageconsearch.umn.edu/record/268371
Language:
English
Total Pages:
36




 Record created 2018-02-15, last modified 2018-02-15

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