Soft Exchange Rate Bands and Speculative Attacks: Theory, and Evidence from the ERM since August 1993

Leonardo Bartolini and Alessandro Prati

No 1998/156, IMF Working Papers from International Monetary Fund

Abstract: We present a model of a “soft” exchange rate target zone and interpret it as a stylized description of the post-August 1993 ERM. Our central bank targets a moving average of the current and past exchange rates, rather than the exchange rate’s current level, thus allowing the rate to move within wide margins in the short run, but within narrow margins in the long run. For realistic parameters, soft target zones are significantly less vulnerable to speculative attacks than “hard” target zones. These predictions are consistent with the ERM’s experience and the abatement of speculative pressure in European markets since the bands’ widening in 1993.

Keywords: WP; central bank; Exchange rate target zones; speculative attacks; speculative attack; interest rate data; exchange rate intervention; post intervention exchange rate; wide-band ERM intervention policy; mean reversion; Exchange rates; Managed exchange rates; Crawling peg; Exchange rate adjustments; Currency markets; Europe (search for similar items in EconPapers)
Pages: 29
Date: 1998-11-01
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Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Soft exchange rate bands and speculative attacks: theory, and evidence from the ERM since August 1993 (1999)
Working Paper: Soft exchange rate bands and speculative attacks: theory and evidence from the ERM since August 1993 (1998)
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