TARGET ZONE MODELS WITH PRICE INERTIA - SOLUTIONS AND TESTABLE IMPLICATIONS

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    Abstract

    Many recent papers suggest that the basic flex-price target zone model does not perform well empirically. This paper investigates the testable implications of a sticky-price target zone model and finds that, to a limited extent, it has a better empirical performance than the simplest flex-price model. However (in terms of nominal variables) the sticky-price model is found to be observationally equivalent to the flex-price model when the latter is extended to include intra-marginal intervention and realignments.

    Original languageEnglish
    Pages (from-to)96-112
    Number of pages17
    JournalThe Economic Journal
    Volume104
    Issue number422
    Publication statusPublished - Jan 1994

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