New Developments of Theoretical Analysis on Exchange-rate Systems

Abstract

This paper is to survey recent developments in a theoretical analysis on exchange rate systems. Many of recent papers on an exchange rate band system use a stochastic process theory following a seminal paper by Krugman (1991) where he stressed a honeymoon effect of exchange rate bands. They have developed the stochastic process approach by relaxing assumptions of price flexibility, foreign exchange intervention, and credibility of exchange rate bands. We focus on a possible regime switching and credibility of keeping regimes which include the exchange rate bands and exchange rate systems. We consider how the credibility of the bands and the systems could affect on the honeymoon effect.