DP393 Target Zones and International Policy Coordination: The Contrast Between the Necessary and Sufficient Conditions for Success

Author(s): Andrew Hughes Hallett
Publication Date: April 1990
Keyword(s): Exchange Rates, Policy Coordination, Target Zones
JEL(s): 133, 311, 423, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=393

This paper distinguishes between some obvious necessary and sufficient conditions for adopting the target zone proposal as a means of improving macroeconomic performance. The necessary conditions may be satisfied fairly easily, but it is a good deal more difficult to design a targeting system that satisfies the sufficient conditions when the exchange rate is used as an intermediate target. On that criterion the gains may be smaller than previously estimated. Target Zones do, however, have important practical advantages. They are effective in promoting stability. They are also a simple but relatively uncontroversial way to secure the coordination necessary to stop policymakers from adopting inefficient or undesirably competitive polici.