A Target Zone Model with the Terminal Condition of Joining a Currency Area

Applied Economics Letters 2011
Viktors Ajevskis

This study aims to generalize the Krugman target zone model for the case of terminal condition of joining a currency area. Using the terminal condition and the ‘smooth pasting conditions’, both analytical and numerical solutions of the problem are obtained. The proposed model is more adequate than the Krugman one when the moment of joining currency area approaches. The properties of the model highlight that monetary authorities have some degree of monetary independence until the moment of entering a currency zone.

Keywords
Ito's lemma, exchange rate, target zone, regulated Brownian motion
DOI
10.1080/13504851.2010.534053
Hyperlink
http://www.tandfonline.com/doi/abs/10.1080/13504851.2010.534053

Ajevskis, V. A Target Zone Model with the Terminal Condition of Joining a Currency Area. Applied Economics Letters, 2011, Vol.18, No.13-15, pp.1273-1278. ISSN 1350-4851. Available from: doi:10.1080/13504851.2010.534053

Publication language
English (en)