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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

  • Chen, Yu-Fu

    () (BOFIT)

  • Funke, Michael

    (BOFIT)

  • Glanemann, Nicole

    (BOFIT)

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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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 6/2010.

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Length: 31 pages
Date of creation: 26 Apr 2010
Date of revision:
Handle: RePEc:hhs:bofitp:2010_006

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Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
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Web page: http://www.suomenpankki.fi/bofit_en/
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Keywords: Currency Board Arrangement; Target Zone Model; Hong Kong;

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Cited by:
  1. Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2011. "The Signalling Channel of Central Bank Interventions: Modelling the Yen / US Dollar Exchange Rate," Quantitative Macroeconomics Working Papers 21110, Hamburg University, Department of Economics.

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