The choice of exchange rate bands: Balancing credibility and flexibility

Alex Cukierman*, Yossi Spiegel, Leonardo Leiderman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

8 Scopus citations

Abstract

This paper develops a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability, but value the flexibility to adjust the nominal exchange rate in response to shocks, in order to attain real exchange rate objectives. The paper provides an endogenous characterization of the optimal exchange rate band in terms of the underlying distribution of shocks to the current and capital accounts of the balance of payments and in terms of the commitment reputation of policymakers.

Original languageEnglish
Pages (from-to)379-408
Number of pages30
JournalJournal of International Economics
Volume62
Issue number2
DOIs
StatePublished - Mar 2004

Keywords

  • Credibility
  • Exchange rate bands
  • Flexibility
  • Floats
  • Partial commitment
  • Pegs
  • Reputation

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