Optimal target zones: how an exchange rate mechanism can improve upon discretion

Article Abstract:

The target zone model developed by Paul Krugman was used to formulate a sub-game perfect and explicit solution for central banks seeking exchange rate stabilization, given that the costs of intervention are proportional. However, a prior commitment to narrow bands were shown to yield a welfare gain. This provides theoretical support for an Exchange Rate Mechanism (ERM). Numerical simulations suggest that the width of the optimal currency band with precommitment via an ERM is merely one-half of that which is under discretion. The welfare benefits were found to be capable of sustaining the system.

Exchange Rates, Research, Economic aspects, Prices and rates, Foreign exchange, Foreign exchange rates, Central banks, Monetary policy

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Repeated real options: optimal investment behaviour and a good rule of thumb

Article Abstract:

The investment under uncertainity in a single investment option is analyzed. It is concluded that repeated options imply a smaller value of waiting than in the case of a single option. the optimal stopping rule is affected differently by changes in underlying patterns.

Denmark, Analysis, Investments

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