13.07.2015 Views

International macroe.. - Free

International macroe.. - Free

International macroe.. - Free

SHOW MORE
SHOW LESS

You also want an ePaper? Increase the reach of your titles

YUMPU automatically turns print PDFs into web optimized ePapers that Google loves.

324 CHAPTER 10. TARGET-ZONE MODELSλ 1 = −λ 2 = λ = q 2/(ασ 2 ) > 0, and ˜B = −Ã >0.(218)⇒To determine ˜B, suppose that f hits the upper band ¯f at time t 0 .Thens(t 0 )=G( ¯f|f, ¯f) = ¯f + ˜B(e −λβ − 1). (10.51)At the next instant t 0 + dt, the authorities either realign or defends(t 0 + dt) =(G( ¯f + β/2| ¯f, ¯f + β) = ¯f +β2w.p. pG( ¯f − β/2|f, ¯f) = ¯f − β 2w.p. 1 − p.(10.52)To maintain uncovered interest parity at the point of intervention, marketparticipants must not expect jumps in the exchange rate. It followsthat, lim ∆t→0 E t0 s(t 0 +∆t) =s t0 . Using (10.52) to evaluate E t0 s(t 0 +dt)and equating to s(t 0 )givesp"¯f + β 2#+(1− p)"¯f − β 2#= ¯f + ˜B(e −λβ − 1),and solving for ˜B gives˜B = (2p − 1) β 2). (10.53)(e −λβ − 1This solution is a striking contrast to the solution under Krugmaninterventions. ˜B is negative if the target zone lacks sufficient credibility(p > 1 ). This means that the exchange rate solution is an inverted ‘Scurve’.The exchange rate under the discrete intervention rule combined2with low defense credibility is even more volatile than what it would beunder a free ßoat.

Hooray! Your file is uploaded and ready to be published.

Saved successfully!

Ooh no, something went wrong!