Autore
Alberola Ila, Enrique

Titolo
How long can a honeymoon last? : institutional and fundamental beliefs in the collapse of a target zone
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 1994 - Fascicolo: 39 - Pagina iniziale: 1 - Pagina finale: 48

The long period of stability in the EMS was followed by crises and realignments which reestablished the exchange rate equilibria. We introduce dynamics into a target zone system with divergences in the fundamentals to explain this outcome. We set up a model with heterogeneous beliefs which stresses the existence of an implicit conflict in a target zone system with divergent fundamentals and show that a nominal target zone while divergences in the fundamentals persist conveys a self-defeating mechanism: it may allow deviations from the equilibrium exchange rate in the short-run, but it is an unsustainable objective in the longrun, because the band cannot attain perfect reputation. Only if the target zone becomes instrument of convergence this fateful outcome may be avoided and IT represents the case for a successful target zone.



Testo completo: http://hdl.handle.net/1814/518

Esportazione dati in Refworks (solo per utenti abilitati)