Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/26125
Authors: 
Bauer, Christian
De Grauwe, Paul
Reitz, Stefan
Year of Publication: 
2007
Series/Report no.: 
CESifo working paper 2080
Abstract: 
The target zone model of Krugman (1991) has failed empirically. In this paper, we develop a model of the exchange rate with heterogeneous agents in a free floating and a target zone regime. We show that this simple model mimics the empirical puzzles of exchange rates: excessive volatility, fat tails, volatility clustering, and disconnection from the fundamentals. In addition, the target zone regime replicates a reduced nominal volatility for the same level of fundamental volatility as in the free floating regime and the distribution of the exchange rate within the band is hump-shaped.
JEL: 
F31
F41
Document Type: 
Working Paper

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