International macroe.. - Free

10.3. INFINITESIMAL MARGINAL INTERVENTION 313which follows because the integral in term (a) is R ∞t e −x/α dx = αe −t/αand the integral in term (b) is R ∞t xe −x/α dx = α 2 e −t/α ( t +1). (10.26) isαthe no bubbles solution for the exchange rate under a permanent freeßoatregime where the fundamentals follow the (η, σ)—diffusion process(10.23) and are expected to do so forever on. This is the continuoustimeanalog to the solution obtained in chapter 3 when the fundamentalsfollowed a random walk.10.3 InÞnitesimal Marginal InterventionConsider now a small-open economy whose central bank is committed tokeeping the nominal exchange rate s within the target zone, s