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Optimal Exchange Rate Policy in a Growing Semi-Open Economy

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  • Philippe Bacchetta

    (University of Lausanne and Centre for Economic Policy Research and Hong Kong Institute for Monetary Research)

  • Kenza Benhima

    (University of Lausanne and Centre for Economic Policy Research)

  • Yannick Kalantzis

    (Banque de France)

Abstract

In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 092014.

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Length: 36 pages
Date of creation: May 2014
Date of revision:
Handle: RePEc:hkm:wpaper:092014

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  1. Gianluca Benigno & Huigang Chen & Christopher Otrok & Alessandro Rebucci & Eric R. Young, 2011. "Financial Crises and Macro-Prudential Policies," IDB Publications 27738, Inter-American Development Bank.
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  7. Bacchetta, Philippe & Benhima, Kenza & Kalantzis, Yannick, 2012. "Capital Controls with International Reserve Accumulation: Can this Be Optimal?," Working Papers, Banco Central de Reserva del Perú 2012-009, Banco Central de Reserva del Perú.
  8. Bussière, Matthieu & Ca' Zorzi, Michele & Chudik, Alexander & Dieppe, Alistair, 2010. "Methodological advances in the assessment of equilibrium exchange rates," Working Paper Series, European Central Bank 1151, European Central Bank.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. China is doing is right with managing its exchange rate
    by Economic Logician in Economic Logic on 2013-11-11 17:24:00
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Cited by:
  1. Bacchetta, P. & Benhima, K. & Kalantzis, Y., 2012. "Capital Controls with International Reserve Accumulation: Can this Be Optimal?," Working papers, Banque de France 406, Banque de France.
  2. Frederick van der Ploeg, 2014. "Guidelines for Exploiting Natural Resource Wealth," OxCarre Working Papers, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford 128, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.

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