a) What is meant by a "“credible target zone"? Develop Krugman's (1991) model and then explain how a credible target zone has a stabilizing effect on the exchange rates. Explain the intuition behind the smooth pasting condition 1 b) Use the Balassa-Samuelson model to explain why the purchasing power parity may not hold in the presence of nontraded goods. How is the relative productivity of tradeable goods of nations related to the real exchange rate? Carefully explain the intuitions using the Balassa-Samuelson model.

a) What is meant by a "“credible target zone"? Develop Krugman's (1991) model and then explain how a credible target zone has a stabilizing effect on the exchange rates. Explain the intuition behind the smooth pasting condition 1 b) Use the Balassa-Samuelson model to explain why the purchasing power parity may not hold in the presence of nontraded goods. How is the relative productivity of tradeable goods of nations related to the real exchange rate? Carefully explain the intuitions using the Balassa-Samuelson model.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 8PA

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