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Forward-rate target zones and exchange rate dynamics

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  • Lin, Hwan C.

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.

Suggested Citation

  • Lin, Hwan C., 2008. "Forward-rate target zones and exchange rate dynamics," Journal of International Money and Finance, Elsevier, vol. 27(5), pages 831-846, September.
  • Handle: RePEc:eee:jimfin:v:27:y:2008:i:5:p:831-846
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    References listed on IDEAS

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    Cited by:

    1. Lera, Sandro Claudio & Sornette, Didier, 2016. "Quantitative modelling of the EUR/CHF exchange rate during the target zone regime of September 2011 to January 2015," Journal of International Money and Finance, Elsevier, vol. 63(C), pages 28-47.
    2. Peter Carr & Zura Kakushadze, 2015. "FX Options in Target Zone," Papers 1512.01527, arXiv.org, revised Jul 2016.
    3. Lo, C.F. & Hui, C.H. & Fong, T. & Chu, S.W., 2015. "A quasi-bounded target zone model — Theory and application to Hong Kong dollar," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 1-17.

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