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Excitation coulombienne --- Physique nucleaire --- Rayons gamma --- Spectrometrie gamma
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The trade-off between interest rate variability and the width of an exchange rate target zone is examined, using the regulated Brownian motion model of target zones. It is shown that for narrow exchange rate bands, and for reasonable parameter values, the interest rate differential's asymptotic variability is increasing in the width of the exchange rate band; whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band. The interest rate differential's instantaneous variability is decreasing in the width of the exchange rate band.
A narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential's instantaneous standard deviation is high and even increases when the zone narrows.
The model is extended to include a realignment/devaluation risk, as well as an endogenous exchange rate risk premium. The risk premium is small for reasonable parameter values and does not matter much.
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In discussions about different international monetary arrangements it is often maintained that exchange rate variability has a negative influence on international trade and foreign investment. This paper addresses one specific aspect of this general issue, namely the effect of exchange rate variability on capital flows and international portfolio diversification. More precisely, we examine how different monetary policies -- and among those, policies that aim at stabilizing exchange rates -- determine the risk characteristics of nominal assets, and how these risk characteristics determine international portfolio composition and trade in assets, when international asset markets are incomplete.
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