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 ?
1) Following Krugman (1991), an exchange rate bands regime is credible when the market agents believe that the lower and upper edges of the band will remain fixed and no changes in central parity are expected.
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.
To allow greater policy flexibility, the Mexican central bank began to use exchange rate bands instead of a fixed exchange rate in late 1991.
1 per cent and announces that it has widened the exchange rate bands from 6 per cent to 9 per cent.
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.
The short-term response to the widening of the exchange rate bands was both interesting and instructive.
Since the loosening of the ERM exchange rate bands in August 1993, the cautious easing of monetary policy has resumed: at the end of the year short-term rates were more than three points below their September 1992 level.
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.
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.
Since the widening of the exchange rate bands in August 1993, the monetary authorities have been cautious.