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The Two-Pillar Policy for the RMB

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  • Urban J. Jermann
  • Bin Wei
  • Vivian Z. Yue

Abstract

We document stylized facts about China's recent exchange rate policy for its currency, the renminbi (RMB). Our empirical findings suggest that a \"two-pillar policy\" is in place, aiming to balance RMB index stability and exchange rate flexibility. We then develop a tractable no-arbitrage model of the RMB under the two-pillar policy. Using derivatives data on the RMB and the U.S. dollar index, we estimate the model to assess financial markets' views about the fundamental exchange rate and sustainability of the policy. Our model is able to predict the modification of the two-pillar policy in May 2017, when a discretion-based \"countercyclical factor\" was introduced for the first time. We also examine the model's ability to forecast RMB movements.

Suggested Citation

  • Urban J. Jermann & Bin Wei & Vivian Z. Yue, 2019. "The Two-Pillar Policy for the RMB," FRB Atlanta Working Paper 2019-8, Federal Reserve Bank of Atlanta.
    • Handle: RePEc:fip:fedawp:2019-08
    DOI: 10.29338/wp2019-08
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    Cited by:

    1. Zhang, Chen & Fang, Ying & Niu, Linlin, 2022. "Changing anchor of the renminbi: A Bayesian learning approach to the decade-long transition," Economic Modelling, Elsevier, vol. 116(C).
    2. Feng, Ling & Le, Duong Thuy & Yuan, Fan, 2023. "Inclusion of the RMB in SDRs and the impossible trinity in China," Economic Systems, Elsevier, vol. 47(2).
    3. Jeffrey Frankel, 2023. "Estimation of Nonlinear Exchange Rate Dynamics in Evolving Regimes," CID Working Papers 429, Center for International Development at Harvard University.

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    More about this item

    Keywords

    exchange rate policy; two-pillar policy; managed float; Chinese currency; renminbi; RMB; central parity; RMB index;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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