What is the currency zone?

The currency zone, also known as the target zone, is the extent in which the exchange rate with a specific foreign currency can fluctuate. Exchange courses are produced on the international financial market. It depends on the expectations of investors, which in turn are based on the monetary policies of the country in which the currency is established. When the country implements the monetary zone, its monetary policy becomes dependent on the behavior of the target foreign currency, because the financial regulatory body must take decisions that cause the value of the local currency to change in a way that approaches changes in the target currency value. The approach of the target zone retains part of the country's independence because it does not have to maintain the exchange rate at the exact level.

currency zones are a compromise between floating or unregulated exchange rates and fixed exchange rates where the currency is allegedly introduced to a foreign currency. The International Monetary Fund, which was created by the Bretton Woods agreement at the end of World War II, was created with a framework of fixed exchange courses. The system has collapsedbecause of their inconvenience; Countries wanted to use both monetary and fiscal tools to promote stability in their domestic economy. Despite the defense of floating rates published in 1953, Milton Friedman persisted concerns about the instability of unregulated exchange courses. The currency belts combined aspects of both systems.

The original reason for the introduction of monetary belts was the stabilization of investment. Approximately repairs of exchange courses discourage speculation from investors who hope to use the exchange rates. They also give investors a reference point where their expectations of future exchange rates can be established. Countries can inspire trust in their currency currency zone that connects the currency with a renowned target currency. The monetary zone also allows the country or monetary union to independence in its monetary policy due to fixed exchange rates and alleviates concerns for credibility.

Independence that currency FriThe SMO has been designed to allow, but it can be a source of instability and the problem of credibility is not completely solved. If the exchange rate is released to the extremes of the permissible extent, the central monetary authority may decide that its return to the center would be too difficult or would include political challenges that they do not want. Instead, it can equalize the band and create a new target exchange rate. Expectations of transport can lead investors to participate in a speculative attack where bonds buy in one currency and avoid the other because they think the exchange rate will change in the way their purchases will be profitable.