The theory of exchange rate target zones focuses on the role of exchange rate expectations in determining exchange rate behaviour and interest rate differentials in currency bands. This paper analyses earlier models of the target zone research programme as well as more recent developments...

We show how agents rational expectations regarding the state-contingent activation of policy instruments do not only impact the asset price it is designed to affect but spill over onto the entire range of asset prices in an economy. We present an application to exchange rate target zones as a...

The paper analyses the international correlations of the European national stock markets and identifies the potential excess returns which can be reaped by means of international diversification in the emerging European stock market relative to a strategy of purely national diversification both...

The present paper incorporates a mechanism of rules-based central-bank interventions into a Dornbusch-type framework. We show that the implied reactions of exchange rates and interest and interest rate differentials in response to a monetary shock depend crucially on the particular monetary...