MACROECONOMIC STABILIZATION AND INTERVENTION POLICY UNDER AN EXCHANGE-RATE BAND

Macroeconomic stabilization and foreign exchange market interventions are investigated for a small open economy with a nominal exchange rate band. In a first-best situation, a band is not advisable from a stabi lization perspective, even though with money demand shocks no welfare losses are incurred. With goods demand shocks, narrowing the band affe cts the optimal coefficient of intramarginal monetary accommodation. W ith restrictions on intramarginal interventions, a band may be desirab le. In particular, with supply shocks and no intramarginal interventio ns, a narrower band is desirable when the central bank attaches a rela tively smaller weight to price, as opposed to output stability. (C) 19 98 Elsevier Science B.V. All rights reserved.