Band of fluctuation

The band exchange rate is a special exchange rate regime, in which the central bank or international monetary agreement to set a fixed rate local currency to an anchor currency, but the price can fluctuate within certain limits therefore ( typically a few percent up and down ). Bandwidth is a systemic component of fixed exchange rates.

Intervention

The bandwidth is limited by an upper and a lower support point. If one of the two intervention points achieved by the current exchange rate, the central bank needs as a buyer or seller of the currency intervention ( intervention ) in the foreign exchange market. Specifically, they must buy a certain foreign currency, and sell when it reaches the lower intervention point when it gets to the upper intervention point. Through their intervention, the central bank creates artificial demand or artificial offer, which counteracts the current price trend.

Permanent interventions by monetary authorities are an indication that between the States concerned held a heterogeneous economic development. This is not eliminated by long-term interventions on the foreign exchange markets, but only by appreciation or depreciation of one or both currencies.

Historical examples

The monetary system of Bretton Woods the major currencies from 1944 to early 1969 were pegged to the U.S. dollar, however, could vary by ± 1.0% initially, later ± 2.25%. This meant that about the U.S. dollar to rise from the average exchange rate to 1.125 % for the upper intervention point or fall by 1.125 % for lower intervention point was allowed before the central bank had to intervene.

In the European Monetary System (EMS ) were agreed with bandwidths between ± 2.25 % and ± 6% ( Italy until January 1992) to 1993, fixed rates between the member countries. After speculation against the pound and the lira this bandwidth has been increased in 1993 to 15%. This so-called Wechselkursystem has become obsolete by the introduction of the euro in 1999. The British pound floated freely since 1993.

Current examples

In the Exchange Rate Mechanism II bandwidths of ± 2.25 % in Denmark and 15 % in Lithuania, in which the national currencies may fluctuate against the euro currently apply.

Market issues

The upper and lower intervention rates are seen economically fixed, administrative maximum and minimum prices that are inconsistent with a free market economy. They do not show the free play of supply and demand, however, for importers, exporters and other market participants a secure basis for calculation. If the foreign exchange markets were left to the floating, there is no bandwidth because the exchange rates may fluctuate freely.

• Monetary policy