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The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone

Hertrich, Markus. (2016) The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone. Review of Economics, 67 (1). pp. 91-120.

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Abstract

In the aftermath of the recent financial crisis, the central banks of small open economies such as the Swiss National Bank (SNB) implemented a unilateral one-sided exchange rate target zone vis-à-vis the euro currency to counteract deflationary pressures. Recently, the SNB abandoned its minimum exchange rate regime, arguing that after having analyzed the costs and benefits of this non-standard exchange rate policy measure, it was no longer sustainable. This paper proposes a model that allows central banks and policymakers to estimate ex-ante the costs of implementing and maintaining a unilateral one-sided target zone (in terms of the expected size of foreign-exchange interventions) and to monitor these costs during the period in which it is enforced. The model also offers central banks a tool to identify the right timing for the discontinuation of a minimum exchange rate regime. An empirtical application of the Swiss case shows the ex-ante estimated size of these costs and reveals that these costs might have been substantial without the abandonment of the minimum exchange rate regime, which accords with the official statements of the SNB.
Faculties and Departments:06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Finanzmarkttheorie (Zimmermann)
06 Faculty of Business and Economics > Departement Wirtschaftswissenschaften > Professuren Wirtschaftswissenschaften > Ökonometrie und Statistik (Kleiber)
UniBasel Contributors:Hertrich, Markus
Item Type:Article, refereed
Article Subtype:Research Article
Publisher:De Gruyter Oldenbourg
ISSN: 0948-5139
e-ISSN:2366-035X
Note:Publication type according to Uni Basel Research Database: Journal article
Language:English
Identification Number:
Last Modified:17 Mar 2017 14:10
Deposited On:18 Nov 2016 08:58

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