Exchange Rate Bands

Exchange Rate Bands

The range of exchange rates a central bank allows its currency to take. Exchange rate bands are used when one currency links its value to that of another currency but allows it to fluctuate within certain limits. Proponents maintain that exchange rate bands give a currency a certain level of flexibility so that it can respond to market factors while leaving control with the central bank. Critics contend that this system is inefficient and leads to unfair practices in international trade. The Chinese renmimbi is a prominent example of a currency that traditionally has existed within exchange rate bands. See also: Crawling peg.
References in periodicals archive ?
Starting in November 1991, when inflation was running at 20% in annual terms, Mexico adopted a system of gradually widening exchange rate bands aimed at giving the central bank scope to strike a better balance between the "credibility" and "flexibility" of its monetary regime (Helpman et al.
They did so not only through the explicit use of exchange rate bands, employed by all countries, except Peru, for a good part of the 1990s, but also through frequent direct and indirect intervention in the foreign exchange market.
To allow greater policy flexibility, the Mexican central bank began to use exchange rate bands instead of a fixed exchange rate in late 1991.
The central bank responded by raising domestic interest rates and shifting the exchange rate bands to accommodate a 9 percent depreciation in the peso.
Dominguez and Kenen [1992] present ample evidence, however, that central banks mainly defend exchange rate bands by intramarginal "leaning-against-the-wind" interventions, so as to keep the exchange rate well away from the edges.
Some Evidence on a Strategic Model of Exchange Rate Bands," in Capital Mobility: The Impact on Consumption, Investment and Growth, edited by L.
Then, on August 2, 1993, EC member states decided to raise the margins of the exchange rate bands to |+ or -~ 15 percent around the central parities, an action coming close to a suspension of the system.
Rose and Svensson (1991) proposed a slightly more elaborate technique to assess the credibility of exchange rate bands.
15) After analyzing daily data for the period of the Louvre Accord preceding the stock market crash, Klein and Lewis conclude that market perceptions of the implicit Louvre exchange rate bands evolved substantially in response to observed interventions.
Fitch notes that the central bank's intention to move toward the exchange rate bands system from the crawling peg regime in the coming months could improve its ability to implement monetary policy.
This will require a gradual narrowing of inflation tolerance bands and closing exchange rate bands as the domestic-currency values in euro terms converge to a stable level.
The exchange rate band within the ERM II is likely to remain wide for the foreseeable future: 15 percent around central parity.