On the sustainability of exchange rate target zones with central parity realignments

•I model a target zone with imperfect credibility and central parity realignments.•I explore the use of discrete interventions with finite reserves on the target zone.•Low credibility and frequent realignments lead to excess exchange rate volatility.•Parity realignments do not prevent the eventual depletion of finite reserves.•The sustainability of the target zone does not depend on its credibility in general.

I show that parity realignments alone do not suffice to ensure the long-run sustainability of an exchange rate target zone with imperfect credibility due to the gambler's ruin problem. However, low credibility and frequent realignments can destabilize the exchange rate.