DP5199 Target Zones in Theory and History: Credibility, Efficiency, and Policy Autonomy

Author(s): Marc Flandreau , John Komlos

Publication Date: August 2005

Keyword(s): target zone , market efficiency hypothesis , credibility , monetary policy , covered interest parity , monetary model , Austria-Hungary

JEL(s): F31 , N32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP5199.asp

A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones. Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.