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Exchange rate target zones and stock price volatility

โœ Scribed by Bernd Kempa; Michael Nelles; Christian Pierdzioch

Publisher
John Wiley and Sons
Year
1999
Tongue
English
Weight
211 KB
Volume
4
Category
Article
ISSN
1076-9307

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โœฆ Synopsis

We show how agents' rational expectations regarding the state-contingent activation of policy instruments do not only impact the asset price it is designed to affect but spill over onto the entire range of asset prices in an economy. We present an application to exchange rate target zones as a state-contingent instrument for monetary policy. In particular we find that any explicit credible target zone for the exchange rate is associated with an implicit target zone for the stock price where the non-linearity of the exchange rate function translates into a corresponding stabilizing non-linearity of the stock price path.

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