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A soft edge target zone model: Theory and application to Hong Kong

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  • Chen, Yu-Fu

    ()
    (BOFIT)

  • Funke, Michael

    (BOFIT)

  • Glanemann, Nicole

    (BOFIT)

Abstract

Hong Kong’s currency is pegged to the US dollar in a currency board arrangement. 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 revamped the one-sided currency board mechanism into a symmetric two-sided system with a narrow exchange rate band. This paper reviews the characteristics of the new currency board arrangement and embeds a theoretical soft edge target zone model typifying many intermediate regimes, to explain the notable achievement of speculative peace and credibility since May 2005.

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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 21/2009.

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Length: 25 pages
Date of creation: 21 Nov 2009
Date of revision:
Handle: RePEc:hhs:bofitp:2009_021

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Keywords: currency board arrangement; target zone model; credibility; Hong Kong;

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  1. Leonardo Bartolini & Alessandro Prati, 1998. "Soft Exchange Rate Bands and Speculative Attacks: Theory, and Evidence from the ERM since August 1993," IMF Working Papers 98/156, International Monetary Fund.
  2. Yin-wong Cheung & Ulf G. Erlandsson, 2005. "Exchange Rates and Markov Switching Dynamics," Working Papers 052005, Hong Kong Institute for Monetary Research.
  3. Dibeh, Ghassan, 2006. "Target zone dynamics where the fundamental follows a SDE with periodic forcing," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 363(2), pages 437-445.
  4. Fung, Hung-Gay & LEUNG, Wai K. & Zhu, Jiang, 2004. "Nondeliverable forward market for Chinese RMB: A first look," China Economic Review, Elsevier, vol. 15(3), pages 348-352.
  5. Leonardo Bartolini & Alessandro Prati, 1997. "Soft versus hard targets for exchange rate intervention," Economic Policy, CEPR & CES & MSH, vol. 12(24), pages 13-52, 04.
  6. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.
  7. Guy Debelle & Jacob Gyntelberg & Michael Plumb, 2006. "Forward currency markets in Asia: lessons from the Australian experience," BIS Quarterly Review, Bank for International Settlements, September.
  8. Genberg, Hans & He, Dong & Leung, Frank, 2007. "Recent Performance Of The Hong Kong Dollar Linked Exchange Rate System," MPRA Paper 9440, University Library of Munich, Germany.
  9. Westerhoff Frank H. & Reitz Stefan, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 7(4), pages 1-15, December.
  10. Labhard, Vincent & Wyplosz, Charles, 1996. "The New EMS: Narrow Bands inside Deep Bands," American Economic Review, American Economic Association, vol. 86(2), pages 143-46, May.
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