The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Exchange Rate Target Zones

  • John Driffill
Reference work entry


A target zone attempts to limit the movement of an exchange rate, avoiding the pitfalls of both a pegged rate and a freely floating rate. The European Monetary System was the prime example. An elegant model of Paul Krugman demonstrates that in theory a target zone does indeed stabilize an exchange rate. But in practice it has been substantially rejected empirically. Williamson’s ‘crawling bands’ around a ‘fundamental equilibrium exchange rate’ develop the concept. Target zones survive among candidates for membership of the Eurozone who take part in the Exchange Rate Mechanism mark II.


Bretton Woods System Brownian motion Capital controls Economic and Monetary Union (EMU) Euro European Monetary System Exchange Rate Mechanism (EU) Exchange rate target zone Fixed exchange rates Floating exchange rates Fundamental equilibrium exchange rate Inflation differentials Monetary theory of the exchange rate Nominal exchange rates Purchasing power parity Real exchange rates Uncovered interest parity Wiener process 

JEL Classifications

This is a preview of subscription content, log in to check access.


  1. Flood, R.P., A.K. Rose, and D.J. Mathieson. 1991. An empirical examination of exchange rate target zones. Carnegie-Rochester Series on Public Policy 35: 7–65.CrossRefGoogle Scholar
  2. Giavazzi, F., and A. Giovannini. 1989. Limiting exchange rate flexibility: The European monetary system. Cambridge, MA: MIT Press.Google Scholar
  3. IMF (International Monetary Fund). 2006. De facto classification of exchange rate regimes and monetary policy frameworks. 31 December. Online. Available at Accessed 23 Oct 2006.
  4. Krugman, P.R. 1991. Target zones and exchange rate dynamics. Quarterly Journal of Economics 106: 669–682.CrossRefGoogle Scholar
  5. Svensson, L.E.O. 1992. An interpretation of recent research on exchange rate target zones. Journal of Economic Perspectives 6(4): 119–144.CrossRefGoogle Scholar
  6. Williamson, J. 1998. Crawling bands or monitoring bands: How to manage exchange rates in a world of capital mobility. International Finance 1: 59–79.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John Driffill
    • 1
  1. 1.