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How to Run a Target Zone? Age Old Lessons from an Austro-Hungarian Experiment

Author

Listed:
  • Marc Flandreau
  • John Komlos
Abstract
This paper considers what we argue was the first experiment of an exchange rate band. This experiment took place in Austria-Hungary between 1896 and 1914. The rationale for introducing this policy rested on precisely those intuitions that modern target zone literature has recently emphasized: the band was designed to secure both exchange rate stability and monetary policy autonomy. However, unlike more recent experiences, such as the ERM, this policy was not undermined by credibility problems. In other words the episode provides us with an ideal testing ground for some important ideas in modern macroeconomics: specifically, can formal rules, when faithfully adhered to, provide policy makers with some advantages such as short term flexibility? First, we find that a credible band has a “microeconomic” influence on exchange rate stability. By reducing uncertainty, a credible fluctuation band improves the quality of expectations, a channel that has been neglected in the modern literature. Second, we show that the standard test of the basic target zone model is flawed and develop an alternative methodology. This enables us to understand why Austro-Hungarian policy makers were so upbeat about the merits of exchange rate target zones. We believe that these findings shed a new light on the economics of exchange rate bands.

Suggested Citation

  • Marc Flandreau & John Komlos, 2001. "How to Run a Target Zone? Age Old Lessons from an Austro-Hungarian Experiment," CESifo Working Paper Series 556, CESifo.
    • Handle: RePEc:ces:ceswps:_556
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    2. Michael D. Bordo & Marc Flandreau, 2003. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 417-472, National Bureau of Economic Research, Inc.
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    1. repec:hal:spmain:info:hdl:2441/322 is not listed on IDEAS
    2. Michael D. Bordo & Marc Flandreau, 2003. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Chapters, in: Globalization in Historical Perspective, pages 417-472, National Bureau of Economic Research, Inc.
    3. repec:spo:wpecon:info:hdl:2441/322 is not listed on IDEAS
    4. Komlos, John & Flandreau, Marc, 2002. "Using ARIMA Forecasts to Explore the Efficiency of the Forward Reichsmark Market," Discussion Papers in Economics 8, University of Munich, Department of Economics.
    5. repec:hal:wpspec:info:hdl:2441/622 is not listed on IDEAS
    6. repec:spo:wpmain:info:hdl:2441/622 is not listed on IDEAS
    7. repec:spo:wpecon:info:hdl:2441/622 is not listed on IDEAS
    8. Marc Flandreau, 2003. "Crises and Punishment : Moral Hazard and the pre-1914 international financial architecture," Working Papers hal-01065035, HAL.
    9. repec:spo:wpmain:info:hdl:2441/322 is not listed on IDEAS
    10. Joao Sousa Andrade & António Portugal Duarte & Adelaide Duarte, 2013. "Testing for Nonlinear Adjustment in the Portuguese Target Zone: Is there a Honeymoon Effect?," EcoMod2013 5305, EcoMod.
    11. repec:hal:spmain:info:hdl:2441/622 is not listed on IDEAS
    12. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2013. "Exchange Rate Target Zones: A Survey Of The Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 27(2), pages 247-268, April.
    13. repec:hal:wpspec:info:hdl:2441/322 is not listed on IDEAS
    14. Heinz Handler, 2016. "Two centuries of currency policy in Austria," Monetary Policy & the Economy, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 61-76.

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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N32 - Economic History - - Labor and Consumers, Demography, Education, Health, Welfare, Income, Wealth, Religion, and Philanthropy - - - U.S.; Canada: 1913-

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