13 Speculative Attack and Target Zone Models of Exchange Rates

Abstract

This paper generalizes the target zone exchange rate as a model formalized by Krugman (1988). The main contributions of these pages consist in 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.