Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility

This paper discusses the choice of exchange‐rate regime. It is argued that in general floating is undesirable, because of the extreme weakness of the economic mechanism that holds the exchange rate close to a level consistent with the fundamentals. Of the alternatives, fixed rates can occasionally m...

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Bibliographic Details
Published in:International finance (Oxford, England) England), 1998-10, Vol.1 (1), p.59-79
Main Author: Williamson, John
Format: Article
Language:English
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Summary:This paper discusses the choice of exchange‐rate regime. It is argued that in general floating is undesirable, because of the extreme weakness of the economic mechanism that holds the exchange rate close to a level consistent with the fundamentals. Of the alternatives, fixed rates can occasionally make sense, where several conditions are all satisfied. But under current conditions of high capital mobility the more prudent choice will in most cases be a system of limited flexibility, in the form of a ‘crawling band’ (a wide band that is adjusted in small steps so as to keep it in line with the fundamentals, but is defended in the traditional ways) or possibly a ‘monitoring band’ (a wide band with similar properties, which is defended only when the rate goes outside the band).
ISSN:1367-0271
1468-2362
DOI:10.1111/1468-2362.00004