Crawling band - Financial definition
Concise definition of the term crawling band
A crawling band is a type of exchange rate system where the currency is allowed to fluctuate within a defined range or band that adjusts periodically based on certain criteria, such as inflation differentials or other economic indicators.
Comprehensive definition of the term crawling band
The crawling band exchange rate system allows a currency's value to fluctuate within a predetermined range that shifts over time, typically to reflect macroeconomic fundamentals or to correct misalignments. This mechanism provides greater stability compared to a free-floating exchange rate while allowing more flexibility than a fixed peg.
For example, a country might use a crawling band to manage its currency against a major trading partner's currency, adjusting the band's midpoint regularly based on inflation differentials or other economic indicators. This approach can help mitigate speculative attacks and provide a more predictable environment for international trade and investment, aligning with practices seen in countries like Chile and Israel in the past.