Currency Regimes– Fixed Parity and Target Zone

A simple fixed-rate system differs from a CBS:

There is no legislative commitment to maintaining the specified parity.

The target level of foreign exchange reserves is discretionary; it bears no particular relationship to domestic monetary aggregates.

In the conventional fixed-rate system, there is a band of up to ±1 percent around the parity level.

The credibility of the fixed parity depends on the country’s willingness and ability to offset imbalances in private sector demand for its currency.

A target zone regime has a fixed parity with fixed horizontal intervention bands up to ±2 percent around the parity. Thus greater scope for discretionary policy.