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What does a G-3 target zone mean for emerging-market economies?

Reinhart, Carmen and Reinhart, Vincent (2000): What does a G-3 target zone mean for emerging-market economies?

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Abstract

This paper examines the argument for a G-3 exchange rate target zone strictly from an emerging market perspective. A commitment to damping G-3 exchange rate fluctuations, however, requires a willingness on the part of G-3 authorities to use domestic monetary policy to that end. Under a system of target zones, then, relative prices for emerging market economies may become more stable, but debt-servicing costs may become less predictable. We use a simple trade model to show that the resulting consequences for welfare are ambiguous.

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