## Soft Exchange Rate Bands and Speculative Attacks: Theory, and Evidence from the ERM since August 1993

_IMF Working Papers, November 1, 1998_

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## Bibliographic details
- Authors: Leonardo Bartolini, Alessandro Prati
- Published: November 1, 1998
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451857375.001

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### Overview
- Authors: Leonardo Bartolini, Alessandro Prati
- Publication date: November 1, 1998
- Core proposition: A model of a “soft” exchange rate target zone is presented and interpreted as a stylized description of the post-August 1993 ERM.
- Short verbal summary: The central bank targets a moving average of the current and past exchange rates, permitting wide short-run fluctuations but enforcing narrow long-run margins; for realistic parameters, soft target zones are significantly less vulnerable to speculative attacks than hard target zones. These theoretical predictions are consistent with the ERM’s experience and the abatement of speculative pressure in European markets since the bands’ widening in 1993.

### Model and mechanism
- Target rule:
  - The central bank targets a moving average of the current and past exchange rates (not the exchange rate’s current level).
- Implications for exchange rate behavior:
  - Allows the rate to move within wide margins in the short run.
  - Constrains the rate within narrow margins in the long run.
- Comparative framework:
  - “Soft” target zones (moving-average targeting) versus “hard” target zones (current-level targeting).

### Main findings and predictions
- Vulnerability to speculative attacks:
  - For realistic parameters, soft target zones are significantly less vulnerable to speculative attacks than hard target zones.
- Consistency with observed outcomes:
  - Model predictions align with the ERM’s experience after August 1993.
  - The model is consistent with the observed abatement of speculative pressure in European markets following the widening of bands in 1993.

### Empirical evidence
- Context: Post-August 1993 European Exchange Rate Mechanism (ERM) experience.
- Empirical concordance:
  - Theoretical predictions about reduced vulnerability and pressure match observed market behavior after the bands’ widening in 1993.

### Subjects and keywords (as listed)
- Subject: Banking, Crawling peg, Currency markets, Exchange rate adjustments, Exchange rates, Financial markets, Foreign exchange, Managed exchange rates
- Keywords: central bank, Crawling peg, Currency markets, Europe, Exchange rate adjustments, exchange rate intervention, Exchange rate target zones, Exchange rates, interest rate data, Managed exchange rates, mean reversion, post intervention exchange rate, speculative attack, speculative attacks, wide-band ERM intervention policy, WP

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/soft-exchange-rate-bands-and-speculative-attacks-theory-and-evidence-from-the-erm-since-2792_