Altered bank and exchange volatility

This paper examines the behaviour of the Czech crown's exchange rate when pegged to a currency basket. The peg is supposed to limit the overall instability of the currency. The GARCH(1,1) model with a dummy variable for the volatility response is used to account for a change in the width of the fluctuation band. The results of this paper show that volatility of the exchange rate decreased after a much wider fluctuation band was introduced to limit movements of the currency basket index.