As far as i understand in the Krugman target zone model the following equation describes the behaviour of the exchange rate within and outside a target zone $s_t = f_t + \alpha E_t(ds_t/dt)$. But if the fundamental $f_t$ follows a random walk why is $s_t = f_t$ (the 45 degree line on the S-curve) a solution to the equation in the free float case?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.