Target Zone Models with Price Inertia: Extended Numerical Solutions

Abstract

For examining the logic of exchange rate regimes a more political based approach is analyzed in a macroeconomic framework. This paper tries to outline the impact of additional defended economic targets on an explicitly announced nominal exchange rate target zone regime. The stochastic exchange rate model used yields an ordinary differential equation (ODE) with interval limits as unknown parameters. By adopting linear and nonlinear target zone restrictions on the foreign exchange market, the ODE has to be solved subject to these restrictions. This problem is solved numerically by a special method which merges the ODE solution process with the parameter identification.