DP382 Currency Bonds, Target Zones and Cash Limits: Thresholds for Monetary and Fiscal Policy

Author(s): Marcus Miller, Paul Weller
Publication Date: March 1990
Keyword(s): Exchange Rates, Fiscal Policy, Monetary Policy
JEL(s): 311, 321, 431, 432
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=382

Exchange rate behavior is analyzed in the context of a stochastic rational expectations model in which there are random shocks to the price setting mechanism and in which the authorities choose to impose either nominal or real exchange rate bands. Results are compared to those that emerge from a simple monetary model subject to velocity shocks. The effects of a realignment of the band, and of fiscal policy used in conjunction with monetary policy to defend the band, are also examined.