WHY EXCHANGE-RATE BANDS - MONETARY INDEPENDENCE IN SPITE OF FIXED EXCHANGE-RATES

The paper argues that the reason real world fixed exchange rate regime s usually have finite bands, instead of completely fixed exchange rate s between realignments, is that exchange rate bands, counter to the te xtbook result, give central banks some monetary independence, even wit h free international capital mobility. The nature and amount of moneta ry independence is specified, informally and in a formal model, and qu antified with Swedish krona data. Altogether the amount of monetary in dependence appears sizable. For instance, an increase in the Swedish k rona band from zero to about +/- 2 percent may reduce the krona intere st rate's standard deviation by about a half.