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Off-the-record target zones: Theory with an application to Hong Kong's currency board

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Author Info

  • Michael Funke

    ()

  • Yu-Fu Chen

    ()

  • Nicole Glanemann

    ()

Abstract

This paper provides a modelling framework for evaluating the exchange rate dyna-mics 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://www.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/Offtherecord.pdf
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Bibliographic Info

Paper provided by Hamburg University, Department of Economics in its series Quantitative Macroeconomics Working Papers with number 21006.

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Date of creation: Jun 2010
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Handle: RePEc:ham:qmwops:21006

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Related research

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

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Cited by:
  1. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2014. "The Signalling Channel of Central Bank Interventions: Modelling the Yen/US Dollar Exchange Rate," Open Economies Review, Springer, vol. 25(2), pages 311-336, April.

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