ALTERED BAND AND EXCHANGE VOLATILITY

This paper examines the behaviour of the Czech crown's exchange rate w hen pegged to a currency basket. The peg is supposed to limit the over all instability of the currency. The GARCH(1,1) model with a dummy var iable for the volatility response is used to account for a change in t he width of the fluctuation band. The results of this paper show that volatility of the exchange rate decreased after a much wider fluctuati on band was introduced to limit movements of the currency basket index .