Target Zones and Realignment Expectations: The Israeli and Mexican Experience

IMF Working Papers, November 1, 1995

Source details

Canonical URL: Target Zones and Realignment Expectations: The Israeli and Mexican Experience

Other formats

Bibliographic details

Authors: Alejandro M. Werner
Published: November 1, 1995
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9781451853766.001

Study overview

Author: Alejandro M. Werner
Date: November 1, 1995
Core question: How did target zone regimes affect exchange rate determination and interest rate variability in Israel and Mexico?
Structure:
- First part: develops a model of exchange rate determination under a target zone regime with stochastic realignments.
- Second part: empirical study of Israel and Mexico under a target zone regime.

Model and theoretical findings

Framework: Exchange rate determination under a target zone regime with stochastic realignments.
Key theoretical conclusion:
- If the variance of the expected realignment is sufficiently large, then the target zone will be useful.
Policy comparison considered:
- Adoption of the target zone versus a fixed exchange rate in terms of reducing the volatility of the interest rate differential.

Empirical findings

Main empirical result:
- The target zone regime helped reduce interest rate variability in Israel and Mexico by absorbing part of the shocks to the expected realignment with movements of the exchange rate inside the band.
Focused outcomes:
- Reduction in interest rate variability.
- Exchange rate movements inside the band absorbed shocks to expected realignment.

Subjects and keywords

Subject: Conventional peg, Crawling peg, Exchange rate adjustments, Exchange rates, Foreign exchange, Managed exchange rates
Keywords: Conventional peg, Crawling peg, differential variance, Exchange rate adjustments, exchange rate deviation, Exchange rates, interest rate differential, interest rate hedging, interest rate variability, Managed exchange rates, WP