SOFT VERSUS HARD TARGETS FOR EXCHANGE-RATE INTERVENTION

Exchange rate intervention by monetary authorities should defend a ban d not for the spot exchange rate, but for a moving average of its rece nt values. This target zone is soft, in that it allows greater short-r un flexibility, but also rigorous: it still precludes any sustained ea sing of monetary policy. In comparison with conventional hard target z ones for the spot exchange rate, we find considerable advantages for t he rule we propose. In particular, without compromising long-run disci pline, it increases resilience against speculative attacks, especially when shocks to exchange rate fundamentals are transitory.