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Soft versus hard targets for exchange rate intervention

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  • Leonardo Bartolini
  • Alessandro Prati

Abstract

type="main" xml:lang="en"> 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.

Suggested Citation

  • Leonardo Bartolini & Alessandro Prati, 1997. "Soft versus hard targets for exchange rate intervention," Economic Policy, CEPR;CES;MSH, vol. 12(24), pages 13-52, April.
  • Handle: RePEc:bla:ecpoli:v:12:y:1997:i:24:p:13-52
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    File URL: http://hdl.handle.net/10.1111/1468-0327.00015
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    Cited by:

    1. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2009. "A Soft Edge Target Zone Model: Theory And Application To Hong Kong," Dundee Discussion Papers in Economics 228, Economic Studies, University of Dundee.
    2. 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.
    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. 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.
    5. M. Isabel Campos López & M. Araceli Rodríguez López, "undated". "Business Cycle Speculative Pressures in a Target Zone," Working Papers on International Economics and Finance 01-04, FEDEA.
    6. Nissanke, Machiko, 2003. "Revenue Potential of the Currency Transaction Tax for Development Finance: A Critical Appraisal," WIDER Working Paper Series 081, World Institute for Development Economic Research (UNU-WIDER).

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