Target zone - Financial definition
Concise definition of the term target zone
A target zone in foreign exchange is a predetermined range within which a currency is allowed to fluctuate against another currency. Central banks intervene to keep the exchange rate within this range.
Comprehensive definition of the term target zone
A target zone system aims to stabilize exchange rates by setting upper and lower bounds for currency fluctuations, helping to reduce volatility and uncertainty in international trade and investment. Central banks monitor the exchange rate and intervene through buying or selling currencies or adjusting interest rates to maintain the exchange rate within the target zone.
An example is the European Exchange Rate Mechanism (ERM), which was used to prepare for the introduction of the euro. This system helps in aligning economic policies among participating countries and provides a buffer against speculative attacks.