Fluctuation bands

The fluctuation bands are the maximum and minimum values ​​between which one currency can fluctuate with respect to another according to some restrictions.

Fluctuation bands

The fluctuation bands are a macroeconomic term that is part of the monetary aggregates and of the economic and monetary policy of the Central Banks. They are also known as buoyancy bands.

The fluctuation bands are only related to countries or areas that have their own currency. However, those countries that do not have their own currency such as Ecuador, whose currency is the dollar, this circumstance does not occur.

The Central Banks are the institutions in charge of ensuring the stability of the exchange rate around these fluctuation margins around the average exchange rate or the official exchange rate. These fluctuation margins are called intervention points.

When the exchange rate exceeds these precautionary levels, the Central Bank intervenes by buying and selling the currency to keep it within these levels. A very clear example of intervention in the exchange rate can be found in the Swiss Central Bank and its intervention in its exchange rate with respect to the euro at the level of 1.18-1.20 at the beginning of 2015, abandoning its exchange rate. minimal change.

Types of exchange systems

In monetary systems there are several types of exchange rate systems, depending on the restrictions to which it is subjected, which can be fixed, flexible or mixed.

Among the mixed systems we find exchange rates with fluctuation bands, which indicate to what extent one currency can be valued with respect to another according to an exchange that, while remaining fixed, can present slight variations typical of the political game. macroeconomic.

This system is based on the idea that in a free market where there are a multitude of currencies, it is difficult by itself to establish a fixed rate between currencies, and also unrealistic, so certain rules of action and margins of action are agreed to maintain in as much as possible parity in the relationship between two or more currencies.

Types of fluctuation bands

There are two types of fluctuation bands:

  1. Symmetric: They are those that revolve around an official central exchange rate. For example +/- 1%.
  2. Asymmetric: These are those that vary depending on how the exchange rate changes.

We can say, therefore, that the Central Banks act in favor of maintaining stable exchange rates that affect the trade balance of the countries. In turn, they are a monetary policy instrument whose intervention can only be carried out by them.

Let us remember that, for example, monetary policy in the EU is carried out by the ECB (European Central Bank), thus, national banks cannot carry out this intervention.

The euro, an example of the establishment of floating bands

This case occurred, for example, during the adoption of the European monetary system for the entry of the euro, where countries had to fix their currency to the German mark, the reference currency at the time, and where the fluctuation should not exceed plus minus 3% of the agreed initial rate.

This allowed countries to adopt stable monetary policies for a few years that allowed them to enter a strong currency without strong imbalances or large fluctuations that would prevent them from accessing a subsequent fixed exchange currency (euro) where monetary decisions were made in a bank single central with the corresponding loss of sovereignty, and that nevertheless did not serve so that countries like Greece, Portugal, Italy or Spain did not have difficulties.