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Title: |
Dynamic Inconsistency and Exchange-Rate Target Zones: A Welfare Analysis |
| Author: |
Zhu, Zhen |
| Author
Affiliation: |
U OK |
| Source: |
International Economic Journal, Spring 1997, v. 11, no. 1, pp. 15-38 |
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Publication Date: |
Spring 1997 |
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Abstract: |
This paper examines the welfare
implications of different exchange-rate systems, especially an
exchange-rate target-zone system, in a context of monetary policy making
and dynamic inconsistency. It is shown that when there is uncertainty,
there is a trade-off between commitment to a rule and discretion. A
free-floating exchange-rate system may have the same loss function
values in terms of price and output fluctuations as that of a target
zone. However, a target-zone system may be more attractive since there
is less exchange-rate fluctuation. Returning to a fixed-rate system may
be worse since it may bring about larger welfare losses especially when
supply shocks dominate. |
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