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Why exchange rate bands? : Monetary independence in spite of fixed exchange rates

Listed author(s):
  • E.O. Svensson, Lars

The paper argues that the reason real world fixed exchange rate regimes usually have finite bands instead of completely fixed exchange rates between realignments is that exchange rate bands, counter to the textbook result, give central banks some monetary independence, even with free international capital mobility. The nature and amount of monetary independence is specified, informally, and in a formal model, and quantified with Swedish krona data. Altogether the amount of monetary independence appears sizable. For instance, an increase in the Swedish krona band from zero to about plus or minus two percent may reduce the krona interest rate's standard deviation by about one-half.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 33 (1994)
Issue (Month): 1 (February)
Pages: 157-199

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Handle: RePEc:eee:moneco:v:33:y:1994:i:1:p:157-199
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809, December.
  2. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
  3. Miller, Marcus & Weller, Paul, 1991. "Exchange Rate Bands with Price Inertia," Economic Journal, Royal Economic Society, vol. 101(409), pages 1380-1399, November.
  4. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
  5. Lindberg, H. & Svensson, L.E. & Soderlind, P., 1991. "Devaluation Expectations: the Swedish Krona 1982-1991," Papers 495, Stockholm - International Economic Studies.
  6. Krugman, Paul & Miller, Marcus, 1993. "Why have a target zone?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 38(1), pages 279-314, June.
  7. Beetsma, R.M.W.J. & van der Ploeg, F., 1992. "Exchange rate bands and optimal monetary accomodation under a dirty float," Discussion Paper 1992-13, Tilburg University, Center for Economic Research.
  8. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
  9. Flood, Robert P. & Rose, Andrew K. & Mathieson, Donald J., 1991. "An empirical exploration of exchange-rate target-zones," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 35(1), pages 7-65, January.
  10. Rose, A.K. & Svensson, L.E., 1991. "Expected and Predicted Realignments: the FF/DM Exchange Rate during the EMS," Papers 485, Stockholm - International Economic Studies.
  11. Goodfriend, Marvin, 1987. "Interest rate smoothing and price level trend-stationarity," Journal of Monetary Economics, Elsevier, vol. 19(3), pages 335-348, May.
  12. Sutherland, Alan, 1995. "Monetary and real shocks and the optimal target zone," European Economic Review, Elsevier, vol. 39(1), pages 161-172, January.
  13. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
  14. Daniel Gros, 1990. "Stabilization Policy with Bands," IMF Working Papers 90/49, International Monetary Fund.
  15. Lindbecg, H. Soderlind, P., 1992. "Target Zone Models and the Intervention Policy; The Swedish Case," Papers 496, Stockholm - International Economic Studies.
  16. Ben Bernanke & Frederic Mishkin, 1992. "Central Bank Behavior and the Strategy of Monetary Policy: Observations from Six Industrialized Countries," NBER Chapters,in: NBER Macroeconomics Annual 1992, Volume 7, pages 183-238 National Bureau of Economic Research, Inc.
  17. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
  18. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters,in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
  19. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1, November.
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