DP5199 Target Zones in Theory and History: Credibility, Efficiency, and Policy Autonomy

Author(s): Marc Flandreau, John Komlos
Publication Date: August 2005
Keyword(s): Austria-Hungary, covered interest parity, credibility, market efficiency hypothesis, monetary model, monetary policy, target zone
JEL(s): F31, N32
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5199

A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones. Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.