The Target Zone Controversy
CAMBRIDGE: Target zones are the new buzz words in international policy debates. The French call for new international monetary arrangements that will put paid to today's supposedly benign neglect of currency fluctuations. The Germans have jumped onto the bandwagon, and the Japanese, whether they mean it or not, express great interest. Should we believe that target zones, to be discussed at the upcoming Cologne Summit, offer a blueprint for the Euro-dollar rate to move in a narrow range, and that the Yen will stop its wild dance?
There is no chance that America will join a scheme that limits its flexibility and puts responsibility for US economic performance in the hands of financially inexperienced and statist-minded socialist governments. Equally remote is the chance that the US will agree with Japan on narrow exchange rate margins; the Japanese can't manage their own economy, so why should America tie itself to their misfortunes?
The superficial reason for target zones is that without large fluctuations between the dollar and the yen, the Asian currency crisis would not have happened. True, the dollar/ yen rate moved a lot in the last 5 years; the Yen rose to 80Yen/$1 and dipped all the way to the 140Yen/$1.