Stabilization Policy with Bands

Author/Editor:

Daniel Gros

Publication Date:

May 1, 1990

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper discusses stabilization policy in the presence of bands for the exchange rate. The bands are modelled in a probabilistic sense: monetary policy has to be such as to keep the probability, that the exchange rate stays within the bands, above a certain threshold. In contrast to other models of target zones, this formulation leads to a linear decision rule and implies sizeable intra-marginal interventions, which corresponds to the experience in the EMS. The extent to which short-run monetary policy is constraint by the bands depends on its own long-run components and on fiscal policy.

Series:

Working Paper No. 90/49

Subject:

English

Publication Date:

May 1, 1990

ISBN/ISSN:

9781451971644/1018-5941

Stock No:

WPIEA0491990

Format:

Paper

Pages:

24

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