Exchange Rate Target Zone (ExchangeRateTargetZone) Mean cashbackforexprofitcalculatorg of Exchange Rate Target Zone The meaning of cashback forex profit calculator forexcashbackprofitcalculator cashbackforexpipcalculator zone can be defined in both broad cashback forex narrow sense Broad exchange rate target zone refers to the exchange rate system arrangement that defines the fluctuation of exchange rate in a certain area (for example, limiting the fluctuation of exchange rate to 10% above and below the central exchange rate) Narrow exchange rate target zone is It refers to the international policy coordination program proposed by the American scholar Williamson in the early 1980s, which focuses on limiting the range of exchange rate fluctuations, including the method of determining the central exchange rate, the domestic policy mix to maintain the target zone, and the international policy coordination to implement the exchange rate target zone, etc. "Exchange rate target zone" is a kind of managed exchange rate system arrangement. It is a managed exchange rate arrangement in which a country allows its exchange rate to fluctuate within a specific band, and the monetary authority (i.e., the central bank) has to intervene once the exchange rate fluctuates beyond this band. The first person to propose "exchange rate target zones" as an exchange rate reform initiative was Dutch Finance Minister Duilsenbery, who in 1976 proposed the establishment of a European Community. In 1976, he proposed the establishment of a target zone for the exchange rate movements of the six European Community countries. In 1985, John-Williamson and Bergsen jointly proposed a detailed exchange rate target zone concept and action plan. The idea of target zones was incorporated into the Louvre Agreement published after the meeting in 1991 Krugman (Krugman) in 1985 Williamson initiated the exchange rate target zone scheme, creating the first normative theoretical model of exchange rate target zones a Krugmans basic target zone theory and model (Krugmans exchange rate target zone theory), and has aroused strong academic interest in the issue of exchange rate target zones Exchange rate There are many types of target zones, but they can be divided into "hard target zones" and "soft target zones", which have a narrow range of exchange rate movements, are not often revised, and the contents of the target zone are made public, and the exchange rate is generally maintained in the target zone through monetary policy The "soft target zone" has a wide range of exchange rate movements and is frequently revised, and the contents of the target zone are not publicly available and are not required to be maintained through monetary policy. Since the proposal to establish an exchange rate target zone was introduced, there have been mixed reviews from various quarters. Exchange rate target zones are unrealistic Exchange rate target zones are characterized by a combination of the flexibility of a floating exchange rate system and the stability of a fixed exchange rate system, and can also promote the coordination of national macroeconomic policies, but the implementation is also a number of difficulties, such as the determination of the equilibrium reference rate, the effective method of maintaining the target, etc. Since the collapse of the Bretton Woods system in 1973, the international monetary system has entered the era of floating exchange rate system. The world has entered a period of mixed exchange rate system with floating exchange rate system as the main feature, including floating exchange rate system, fixed exchange rate system and intermediate exchange rate system, including the frequent and violent exchange rate fluctuations, which has brought great risks and difficulties to international trade and investment. According to the view of the G-10, an exchange rate target zone is a set of adjustable exchange rates designed by the relevant authorities, which are compatible with the basic balance of payments in the long run, and a wide range of fluctuation is established around this set of adjustable exchange rates. ) believe that the exchange rate target zone is a hybrid system, which has both the stability of a fixed exchange rate system and the flexibility of a floating exchange rate system It is different from a fully floating exchange rate system because the monetary authorities in the exchange rate target zone system to intervene in the foreign exchange market to make the exchange rate float in the target zone, rather than floating without restrictions It is also different from a managed floating exchange rate system, the difference is twofold: (1) the authorities in the target zone in a certain (2) the authorities in the target area are more concerned about exchange rate fluctuations and, if necessary, use monetary policy and other measures to limit exchange rate fluctuations to the target area as much as possible. system, because when necessary, the target area can also be adjusted when the target area of the exchange rate target area is determined 1, the choice of currency in the target area system The first issue to be considered in the application of the exchange rate target area is the choice of currency in the target area system In determining what kind of currency should be included in the exchange rate target area, the following three aspects can be handed 1) priority should be given to include the currencies of major currency countries So far, the International trade is still controlled by large countries, and these large industrialized countries mostly use some degree of floating exchange rate system, or even a free floating exchange rate system Therefore, in order to achieve exchange rate stability, in principle, the currencies of these major trading countries, which are also major currency countries, should be made to accept the arrangement of exchange rate restrictions within the target zone This is a more ideal design, and in practice, should also consider a countrys foreign trade (2) Further consideration should be given to the characteristics of potential member countries. This analysis involves a comprehensive judgment of the degree of economic openness, the size of the economy, the degree of diversification of commodities, the degree of factor mobility and the similarity of inflation, etc. The currencies of countries with a high degree of economic openness, a small economy, a high degree of diversification, sufficient factor mobility and similar inflation rates should be included in the target zone. Of course, this choice is not simple and easy, multiple characteristics often conflict with each other, when the overall trade-off around the main contradiction is necessary 3) To consider the efficiency of the management of the target area from the perspective of management efficiency to choose, of course, is to include a small number of types of currency is better on the one hand, only when the number is small, the management of the central exchange rate is feasible; on the other hand, when On the other hand, when the number of participants is large, negotiation will be more difficult, and at the same time will increase the risk of system collapse due to conflicts 2, the problem of estimating the central exchange rate in the exchange rate target area An implicit assumption in the application of the exchange rate target area is that the management can effectively estimate the equilibrium (actual) exchange rate In practice, three main methods and techniques of exchange rate estimation are used, they are the purchasing power parity method, the estimated structural method and potential equilibrium method Among them, the PPP method is the most convenient to calculate but when applying this method to determine the appropriate level of the exchange rate, it does not take into account the influence of basic economic factors on the exchange rate, therefore, it calculates the nominal level of the exchange rate when the actual level of the exchange rate does not change; at the same time, the theoretical conditions for the parity to hold are difficult to hold in the real economy; moreover, in its application, it also faces the base period selection and index But the PPP theory still has its reasonable components, especially under the condition that the exchange rate is affected by inflation for a long time, the application effect is better. 3, the problem of determining the width of the exchange rate target area After the central exchange rate of the exchange rate target area is clarified, a key issue is to determine the control range of the real exchange rate fluctuations around the central exchange rate, that is, to determine the width of the target area area Generally speaking, the target area of the exchange rate 1) The exchange rate target zone must be wide enough to provide a buffer so that temporary exchange rate disturbances that do not change the long-run equilibrium real exchange rate level can be within the zone According to Krugmans target exchange rate zone theory, the management intervenes only when the real exchange rate fluctuations are close to the border, so this buffer zone provides the management with a way to separate the long-term trend of the exchange rate 2) The exchange rate target zone should be wide enough to reflect the uncertainty of the equilibrium exchange rate at the center of the target zone itself because, in many models for calculating the equilibrium exchange rate, the parameters have some degree of uncertainty and it is questionable whether the equilibrium exchange rate can be accurately predicted. 3) The width of the exchange rate target zone is also influenced by speculative factors It is well known that one of the shortcomings of a fixed exchange rate system is that it allows speculators to make "one-way gambles" on the direction of exchange rate changes In order to avoid excessive speculation, the target zone must be wide enough to allow for random fluctuations in the central exchange rate 4) The width of the exchange rate target zone is also related to the number of parameters included in the target zone. The width of the target zone is also related to the types of currencies included in the target zone Those target zones that include multiple currencies are obviously different from zones that include only two currencies, and in general, the former should be wider than the latter The maintenance and adjustment of the exchange rate target zone The determination of the exchange rate target zone is the primary problem in the application of the target zone theory, but not the whole problem, the maintenance and adjustment of the exchange rate target zone is another type of key problem in the application of the target zone theory Among them. How to apply policy instruments to keep the exchange rate in the target zone is directly related to the success of the target zone; and the adjustment of the target zone is related to the long-term sustainability of the exchange rate target zone 1. Policy intervention in the exchange rate target zone The most common is the monetary policy exchange rate target zone differs from the existing intermediate exchange rate system in that more monetary policy instruments are applied to maintain the exchange rate when the nominal exchange rate falls to the region When the nominal exchange rate falls to the bottom of the zone, the local currency appreciates by reducing the money supply and raising its interest rate relative to that of other countries, thus bringing the nominal exchange rate back into the target zone; conversely, when the nominal exchange rate rises to the top of the zone, the opposite monetary policy maneuver is used to bring the exchange rate back to the central rate The application of monetary policy instruments to maintain the exchange rate means that the participating countries in the target zone have to seek more cooperation in monetary policy In general, as long as a countrys monetary policy instruments are effective, it can influence the nominal and real exchange rate levels through its own monetary policy. The question here is whether the government is willing to maintain its external equilibrium objective at the expense of applying monetary policy to achieve its internal objectives to some extent.　　A concomitant question is that if the government accepts the application of monetary policy as the most basic means of controlling the exchange rate, what policy is used to achieve the internal equilibrium objective when monetary policy is more concerned with the external equilibrium objective? One possible option is fiscal policy. In theory, when the exchange rate is fixed, monetary policy is more suitable for achieving external equilibrium, while fiscal policy is more suitable for achieving internal equilibrium. Therefore, this arrangement of using mainly monetary policy to control the exchange rate and fiscal policy to achieve the internal equilibrium objective has its feasibility. At the same time, other policy instruments should be considered in practice to achieve the internal objective together with fiscal policy.　　The second possible policy instrument to keep the exchange rate within the target zone is stable foreign exchange market intervention By stable intervention, we mean that intervention in the foreign exchange market does not change the basis of the money supply, i.e., the management influences the exchange rate level through intervention in the foreign exchange market under the condition of maintaining control over the domestic money supply Stable foreign exchange market intervention is a fast and effective tool for reducing short-term fluctuations in the exchange rate tool, but it is difficult to work in the medium and long term, and frequent foreign exchange market intervention can affect the market behavior of exchange rate changes Therefore, such an approach should not be used as the main intervention policy, but can be used as an auxiliary tool The third possible policy tool is to influence exchange rate fluctuations through controls on capital In practical application, on the one hand, the overall control of the capital account does not eliminate cross-border flows of private capital On the other hand, the efficiency loss of resource allocation caused by the implementation of capital controls is too large, even exceeding the cost of exchange rate deviation from the target zone itself Therefore, this approach is also a stopgap measure and should not be the basic control instrument As mentioned above, the most basic policy to control the exchange rate is still monetary policy Once the exchange rate target zone is established, monetary policy should focus more on external objectives When the member countries of the target zone can The arrangement is effective when monetary policy cooperation can be carried out smoothly, when stable foreign exchange market intervention can alleviate the regulatory obligations of monetary policy to a certain extent, and when fiscal policy can be more effective in achieving internal balance objectives, but this puts high demands on the managements ability to apply the policy, which is why exchange rate target zones must rely on a strong government to implement 2. When the factors affecting the determination of the central exchange rate of the target area and the setting of the target area range change fundamentally, the target area of the exchange rate should be adjusted in a timely manner, and the timing and frequency of adjustment are related to the following factors Changes in real economic conditions refer to permanent changes in terms of trade, persistent differences in labor productivity across countries, international shifts in investment and savings preferences, etc. Such changes in real economic conditions usually do not occur within a short time interval and therefore do not cause frequent changes in the target zone. 2) Variability of macroeconomic policies Changes in real economic conditions can be mediated in two ways: one is to maintain the target zone unchanged and adjust macroeconomic policies; the other is, macroeconomic policies remain unchanged and adjust the exchange rate target zone Therefore, the fixed nature of the policy increases the frequency of exchange rate target zone adjustments 3) There is also the issue of credibility Frequent revisions to the exchange rate target zone will reduce the credibility of the target zone itself, thus reducing its value in influencing exchange rate expectations In addition, the target zone for maintaining a fixed Therefore, from the perspective of credibility, a balance between the two should be sought to construct a target zone for the RMB exchange rate The practical significance of establishing a target zone for the RMB exchange rate in China lies first in the fact that the establishment of a target zone for the RMB exchange rate sends a clear signal to the market, enhances the publics psychological expectation that the exchange rate will remain stable, and improves the effectiveness of exchange rate policy. On the other hand, moderate fluctuations of the exchange rate in the target zone can regulate the supply and demand in the foreign exchange market, reduce unreasonable arbitrage of capital flows, and make the impact of various unfavorable factors in the target zone can be alleviated and released The practical significance of Chinas establishment of the exchange rate target zone also lies in the fact that it can maintain the independence of monetary policy operations and rhythmically isolate the impact of capital flows on monetary policy. With a wider floating range, exchange rate changes will be more flexible. Since the expected exchange rate changes are no longer unidirectional and stable, the risk cost of arbitrage will increase, thus weakening the incentive for speculative capital inflows to arbitrage. Under a managed floating exchange rate system, the central bank has to use monetary policy to adjust the exchange rate frequently at a relatively fixed level in order to maintain the stability of the exchange rate. The improvement of the efficiency of exchange rate policy also promotes monetary policy to effectively achieve the goal of internal macroeconomic balance without being too much subject to external factors, which will be conducive to the rational flow and allocation of capital, and to achieve price equilibrium in the money market and foreign exchange market, and to promote the coordinated, balanced and sustainable development of the macroeconomy both internally and externally