Exchange rate intervention by monetary authorities should defend a band not for the spot exchange rate, but for a moving average of its recent values. This target zone is soft, in that it allows greater short-run flexibility, but also rigorous: it still precludes any sustained easing of monetary...

At the inception of economic and monetary union (EMU), an open question was whether execution of monetary policy by the Eurosystem could effectively stabilize liquidity and short-term interest rates. Potential problems could arise from the central bank’s limited knowledge of the new euro area...