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320 CHAPTER 10. TARGET-ZONE MODELSMarket participants know that at the next instant the authorities willreset f = 0. It follows thatE t0 s(t 0 + dt) =s(t 0 + dt) =G[0|f, ¯f] =0. (10.46)To maintain international capital market equilibrium, uncovered interestparity must hold at t 0 . 6 The expected depreciation at t 0 mustbe Þnite which means there can be no jumps in the time-path of theexchange rate. It follows thatlim s(t 0 + ∆t) =s(t 0 ),∆t→0which implies s(t 0 )=s(t 0 + dt) = 0. Adopt a normalization by settings(t 0 ) = 0 in (10.45). It follows that˜B =−β2[e −λβ − 1] .But if s(t 0 + dt) =G(0|f, ¯f) =0ands(t 0 )=G( ¯f|f, ¯f) =0,thenthere are at least two values of f that give the same value of s so the G—function is not one-to-one. In fact, the G—function attains its extremabefore f reaches f or ¯f and behaves like a parabola near the bands asshown in Figure 10.2.As f(t) approaches ¯f, it becomes increasingly likely that the centralbank will reset the exchange rate to its central parity. This informationis incorporated into market participant’s expectations. When f issufficiently close to ¯f this expectational effect dominates and furthermovements of f towards ¯f results in a decline in the exchange rate. Forgiven variation in the fundamentals within [f, ¯f], the exchange rate underFlood-Garber intervention exhibits even less volatility than it doesunder Krugman intervention.10.5 Eventual CollapseThe target zone can be maintained indeÞnitely under Krugman-styleinterventions because reserve loss or gain is inÞnitesimal. Any Þxed6 If it does not, there will be an unexploited and unbounded expected proÞtopportunity that is inconsistent with international capital market equilibrium.