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

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  • Chen Yu-Fu

    (University of Dundee, Economic Studies, 3 Perth Road, School of Business, Dundee, Scotland DD1 4HN, UK)

  • Funke Michael

    (Department of Economics, Hamburg University and CESifo, Munich)

  • Glanemann Nicole

    (Department of Economics, Hamburg University, Munich)

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.

Suggested Citation

  • Chen Yu-Fu & Funke Michael & Glanemann Nicole, 2013. "Off-the-record target zones: theory with an application to Hong Kong’s currency board," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 17(4), pages 373-393, September.
    • Handle: RePEc:bpj:sndecm:v:17:y:2013:i:4:p:373-393:n:5
    DOI: 10.1515/snde-2012-0034
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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.
    2. Yu‐Fu Chen & Michael Funke & Richhild Moessner, 2018. "Informal one‐sided target zone model and the Swiss franc," Review of International Economics, Wiley Blackwell, vol. 26(5), pages 1130-1153, November.
    3. Hertrich Markus, 2016. "The Costs of Implementing a Unilateral One-Sided Exchange Rate Target Zone," Review of Economics, De Gruyter, vol. 67(1), pages 91-120, May.
    4. Boris Blagov & Michael Funke, 2016. "The Credibility of Hong Kong's Currency Board System: Looking Through the Prism of MS-VAR Models with Time-Varying Transition Probabilities," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(6), pages 895-914, December.
    5. Yu-Fu Chen & Michael Funke & Nicole Glanemann, 2011. "The Signalling Channel of Central Bank Interventions: Modelling the Yen / US Dollar Exchange Rate," CESifo Working Paper Series 3610, CESifo.

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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