The fluctuation bands are the maximum and minimum values between which one currency can fluctuate with respect to another according to some restrictions. The fluctuation bands are a macroeconomic term that is part of the monetary aggregates and the economic and monetary policy of the Central Banks. They are also known as flotation bands.
In monetary systems there are several types of exchange systems , depending on the restrictions to which they are subjected, which can be fixed, flexible or mixed.
Among the mixed systems we find the exchange rates with fluctuation bands, which indicate to what extent one currency can be valued with respect to another according to a change that, while still being fixed, may present slight variations of the policy game macroeconomic
This system is based on the idea that in a free market where there are many currencies, it is difficult by itself to establish a fixed rate between currencies, and also unreal, so they agree on certain rules of action and margins of action to keep as far as possible the parity in the relationship between two or more currencies .
The fluctuation bands only relate 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, do not give this circumstance.
The Central Banks are the institutions responsible for ensuring the stability of the exchange rate around these margins of fluctuation around the average exchange rate or the official exchange rate. These fluctuation margins are called intervention points.
When the exchange rate exceeds these levels of caution, 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 is found in the Central Bank of Switzerland and its intervention in its exchange rate with respect to the euro at the level of 1.18-1.20 at the beginning of the year 2015 leaving its type of minimum change
Types of fluctuation bands
There are two types of fluctuation bands:
- Symmetric:Those that pivot around an official central exchange rate. For example +/- 1%.
- Asymmetric: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 an instrument of monetary policy whose intervention can only be carried out by them.
Recall that, for example, monetary policy in the EU is carried out by the ECB (European Central Bank) , so that national banks cannot carry out this intervention.
The euro, an example of establishing flotation bands
This case occurred, for example, during the adoption of the European monetary system for the entry of the euro, where countries had to set their currency to the German mark, then the reference currency, and where the fluctuation should not exceed 3% of the Initial rate agreed.
This allowed countries to adopt stable monetary policies for some years that would allow 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 taken 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.