Are exchange rate bands better than fixed exchange rates? The imported credibility approach

Melvyn Coles, Apostolis Philippopoulos

Research output: Contribution to journalArticle

Abstract

This paper explicitly incorporates exchange rate bands into the Barro-Gordon model of inflation. This is a non-trivial extension. Focusing on Markov-perfect equilibria, we specify the properties of the optimal policy functions, exchange rate dynamics and hence the arguments for and against target zones. The attractiveness of alternative exchange rate regimes (i.e. fixed, flexible and target zones) and the position of exchange rates inside the band depend on the inflationary performance of the center country.

Original languageEnglish (US)
Pages (from-to)133-153
Number of pages21
JournalJournal of International Economics
Volume43
Issue number1-2
DOIs
StatePublished - Aug 1997

Keywords

  • Dynamic policy games
  • Exchange rate bands
  • Inflation

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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