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How are Exchange Rates Managed? Evidence of an Anchor-Based Heuristic

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  • Kang Chen
  • Chang Yee Kwan

Abstract

type="main" xml:id="twec12233-abs-0001"> Central banks often intervene in the foreign exchange market to obtain desirable exchange rates. How this is done has remained totally opaque although central banks are likely to adopt a satisficing rather than optimizing strategy as they need to intervene frequently in a timely manner under incomplete information. In this paper, we propose a simple exchange rate management rule that spreads the volatilities originated from the anchor currencies among the exchange rates with the domestic currency. We test out this rule on 10 currencies and find the empirical evidence consistent with the proposed anchor-based heuristic.

Suggested Citation

  • Kang Chen & Chang Yee Kwan, 2015. "How are Exchange Rates Managed? Evidence of an Anchor-Based Heuristic," The World Economy, Wiley Blackwell, vol. 38(6), pages 1006-1014, June.
    • Handle: RePEc:bla:worlde:v:38:y:2015:i:6:p:1006-1014
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