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Off-the-Record Target Zones: Theory with an Application to Hong Kong’s Currency Board

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  • Yu-Fu Chen
  • Michael Funke
  • Nicole Glanemann

Abstract

This paper provides a modelling framework for evaluating the exchange rate dynamics of a target zone regime with undisclosed bands. We generalize the literature to allow for asymmetric one-sided regimes. Market participants' beliefs concerning an undisclosed band change as they learn more about central bank intervention policy. We apply the model to Hong Kong's one-sided currency board mechanism. In autumn 2003, the Hong Kong dollar appreciated from close to 7.80 per US dollar to 7.70, as investors feared that the currency board would be abandoned. In the wake of this appreciation, the monetary authorities nally revamped the regime as a symmetric two-sided system with a narrow exchange rate band.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_235.pdf
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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 235.

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Length: 23 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:dun:dpaper:235

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Keywords: Currency Board Arrangement; Target Zone Model; Hong Kong;

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Cited by:
  1. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate," Dundee Discussion Papers in Economics 260, Economic Studies, University of Dundee.

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