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Soft versus hard targets for exchange rate intervention

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  • Leonardo Bartolini
  • Alessandro Prati

Abstract

Exchange rate intervention by monetary authorities should defend a band not for the spot exchange rate, but for a moving average of its recent values. This target zone is soft, in that it allows greater short-run flexibility, but also rigorous: it still precludes any sustained easing of monetary policy. In comparison with conventional hard target zones for the spot exchange rate, we find considerable advantages for the rule we propose. In particular, without compromising long-run discipline, it increases resilience against speculative attacks, especially when shocks to exchange rate fundamentals are transitory. Copyright Centre for Economic Policy Research, Centre for Economic Studies, Maison des Sciences de l'Homme 1997.

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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 12 (1997)
Issue (Month): 24 (04)
Pages: 13-52

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Handle: RePEc:bla:ecpoli:v:12:y:1997:i:24:p:13-52

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Cited by:
  1. Nissanke, Machiko, 2003. "Revenue Potential of the Currency Transaction Tax for Development Finance: A Critical Appraisal," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. John Weeks, 2009. "The Impact of the Global Financial Crisis on The Economy of Sierra Leone," Country Study 18, International Policy Centre for Inclusive Growth.
  3. Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2009. "A soft target zone model: Theory and application to Hong Kong," Quantitative Macroeconomics Working Papers 20912, Hamburg University, Department of Economics.
  4. Bartolini, Leonardo & Prati, Alessandro, 1999. "Soft exchange rate bands and speculative attacks: theory, and evidence from the ERM since August 1993," Journal of International Economics, Elsevier, vol. 49(1), pages 1-29, October.
  5. Chen, Yu-Fu & Funke, Michael & Glanemann, Nicole, 2009. "A soft edge target zone model: Theory and application to Hong Kong," BOFIT Discussion Papers 21/2009, Bank of Finland, Institute for Economies in Transition.
  6. M. Isabel Campos López & M. Araceli Rodríguez López, . "Business Cycle Speculative Pressures in a Target Zone," Working Papers on International Economics and Finance 01-04, FEDEA.

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