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Off-the-Record Target Zones: Theory with an Application to Hong Kongs Currency Board

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  • Chen, Yu-Fu
  • Funke, Michael
  • Glanemann, Nicole

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 finally revamped the regime as a symmetric two-sided system with a narrow exchange rate band.

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File URL: http://repo.sire.ac.uk/handle/10943/169
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Bibliographic Info

Paper provided by Scottish Institute for Research in Economics (SIRE) in its series SIRE Discussion Papers with number 2010-38.

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Date of creation: 2010
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Handle: RePEc:edn:sirdps:169

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

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Cited by:
  1. Chen, Yu-Fu & Funke, Michael & Glanemann, Nicole, 2011. "The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate," SIRE Discussion Papers 2011-66, Scottish Institute for Research in Economics (SIRE).

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