Target zones in History and Theory : efficiency, credibility and policy autonomy
CEPR Discussion paper
CEPR Discussion paper : n°5199
target zone, market efficiency, monetary policy, covered interest parity
A natural experiment with an exchange-rate band in Austria-Hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones. Providing a new derivation of the target zone model as a set of nested hypotheses, the inference is drawn that policy credibility and market efficiency were paramount in the success of the Austro-Hungarian experience.