LectureTARGETZONEII国际金融-南开,胡春田.docVIP

Lecture 7:TARGET ZONE II Krugman’s Model (Q.J. E. 1991) Question: How the ER behave when it is inside the band and the zone is not actively being defended ? The basic model : (1) monetary policy : m↓ to prevent s from ; m↑ to prevent s from ; m not changed if choose units s.t. assume (2) Intuitive approach to the effect of a T.Z. on S: S is the same as in flexible case if the rate is within the band? The intuition is wrong. ∵ random walk (see Digression) i.e. when flexible But when  ============================================================= Digression Discrete version of proving If , ============================================================= The expected changes of the exchange rate is negative when S is approaching the upper band?So the true exchange rate should be less than that in the flexible case? That implies the shape of the exchange rate is S shaped,as in the figure? Solve the model We try to find the mathematic representation of the S-shaped curve (3) Consider the case when s is within the band, i.e. m constant, By Ito’s lemma,(see Appendix 1) (4) (4) into (1) (5) Compare (see appendix 2 ) With , (6) (7) A? B to be determined From (6), g and () are one to one matching, i.e. One particular ∴ If s(t) hits the upper band ,The central bank intervenes to prevent from moving out of the band ,This requires only small (infinitesimal) intervention. Once S moves back into the band (∵v ), no more intervention required. In math notion, at the instant of intervention, i.e. If , , in Krugman’s paper ,when s is within , (11) (12) (11) (12) solve A and ,given In Krugman’s paper,