TARGET ZONE MODELS WITH PRICE INERTIA - SOLUTIONS AND TESTABLE IMPLICATIONS

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.