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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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    2. 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.
    3. 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.
    4. Peter P. Carr & Zura Kakushadze, 2017. "FX options in target zones," Quantitative Finance, Taylor & Francis Journals, vol. 17(10), pages 1477-1486, October.
    5. Arcand, Jean-Louis & Kumar, Shekhar Hari & Hongler, Max-Olivier & Rinaldo, Daniele, 2023. "Can one hear the shape of a target zone?," Journal of Mathematical Economics, Elsevier, vol. 107(C).

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