Forward-rate target zones and exchange rate dynamics

Hwan Lin

Journal of International Money and Finance, 2008, vol. 27, issue 5, 831-846

Abstract: A target zone for the forward exchange rate is developed using a log-linear monetary model. Exchange rates are driven by a Wiener process. A central bank purchases or sells foreign exchange forward to keep the target forward rate in a specified band. Defending such a target zone does not require regulated Wiener process, for the central bank's forward exchange intervention can avoid disturbing the money supply. A forward-rate target zone can stabilize the spot rate against a free float and its stabilizing effects become more significant if the delivery term applying to the target forward rate is shorter.

Date: 2008
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:27:y:2008:i:5:p:831-846

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