L. Bartolini et A. Prati, Soft exchange rate bands and speculative attacks: theory, and evidence from the ERM since August 1993, J INT ECON, 49(1), 1999, pp. 1-29
We present a model of a "soft" exchange rate target zone and interpret it a
s a stylized description of the post-august 1993 ERM. Our central bank targ
ets a moving average of the current and past exchange rates, rather than th
e exchange rate's current level, thus allowing the rate to move within wide
margins in the short run, but within narrow margins in the long run. For r
ealistic parameters, soft target zones are significantly less vulnerable to
speculative attacks than "hard" target zones. These predictions are consis
tent with the ERM's experience and the abatement of speculative pressure in
European markets since the bands' widening in 1993. (C) 1999 Elsevier Scie
nce B.V. All rights reserved.