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Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates

Author

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  • Svensson, Lars E.O.

Abstract

The paper argues that real world fixed exchange rate regimes usually have finite bands instead of completely fixed exchange rates between realignments because exchange rate bands, contrary 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. The amount of monetary independence thus achieved appears sizeable. For instance, an increase in the Swedish krona band from zero to about +2% may reduce the krona interest rate's standard deviation by about 1/2.

Suggested Citation

  • Svensson, Lars E.O., 1992. "Why Exchange Rate Bands? Monetary Independence in Spite of Fixed Exchange Rates," CEPR Discussion Papers 742, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:742
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    Cited by:

    1. Barry Eichengreen., 1993. "International Monetary Arrangements for the 21st Century," Center for International and Development Economics Research (CIDER) Working Papers C93-021, University of California at Berkeley.
    2. Manmohan Agarwal, 2017. "The Operation of the Gold Standard in the Core and the Periphery Before the First World War," Working Papers id:12074, eSocialSciences.
    3. Beetsma, Roel M. W. J. & van der Ploeg, Frederick, 1998. "Macroeconomic stabilization and intervention policy under an exchange rate band," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 339-353, April.
    4. Jorge Enrique Restrepo, 1998. "Reglas monetarias en Colombia y Chile," Coyuntura Económica, Fedesarrollo.
    5. Lee E. Ohanian & Alan C. Stockman, 1997. "Short-run independence of monetary policy under pegged exchange rates and effects of money on exchange rates and interest rates," Proceedings, Federal Reserve Bank of Cleveland, pages 783-814.
    6. Rose, Andrew K. & Svensson, Lars E. O., 1994. "European exchange rate credibility before the fall," European Economic Review, Elsevier, vol. 38(6), pages 1185-1216, June.
    7. Antonio Francisco A. Silva Jr., 2010. "Brazilian Strategy for Managing the Risk of Foreign Exchange Rate Exposure During a Crisis," Working Papers Series 207, Central Bank of Brazil, Research Department.
    8. Elias Belessakos & Michael Papaioannou, 1996. "Simple credibility tests of the ERM bands for the pound sterling and the Italian lira," Open Economies Review, Springer, vol. 7(3), pages 219-236, July.
    9. Dionisio Dias Carneiro & Marcio Gomes Pinto Garcia, 1993. "Capital flows and monetary control under a domestic currency substitution regime: The recent Brazilian experience," Textos para discussão 304, Department of Economics PUC-Rio (Brazil).
    10. Mundaca, Gabriela & Oksendal, Bernt, 1998. "Optimal stochastic intervention control with application to the exchange rate," Journal of Mathematical Economics, Elsevier, vol. 29(2), pages 225-243, March.

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    Keywords

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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