target zone (exchange rates)

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A range within which a country seeks to keep its exchange rate. The range may be broad or narrow, and may be specified in terms of some single foreign currency or some suitable basket of foreign currencies. A target zone can be interpreted in a strict or relaxed manner. With a strict target zone the country's central bank is committed to intervening to prevent the market rate moving outside the target zone, while retaining discretion over intervention when the market rate is within the zone. With a relaxed target zone, the central bank promises to adopt policies calculated to bring the market rate back within the target zone if it strays outside, but not necessarily to intervene in the market to achieve this result immediately.

Subjects: Economics.

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