The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
In this paper we generalize the target zone exchange rate as model formalized by Krugman (1988b). The main contributions of these pages consist of linking the recent developments in the theory of target zones to the mirror image theory of speculative attacks on asset price fixing regimes and in using aspects of that linkage to give an intuitive interpretation to the “smooth pasting” condition often invoked as a terminal condition. We aim to unify these two literatures by showing that the solution concepts in both are identical.