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

Author

Listed:
  • Michael Funke
  • Yu-Fu Chen
  • Nicole Glanemann

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.

Suggested Citation

  • Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2009. "A soft target zone model: Theory and application to Hong Kong," Quantitative Macroeconomics Working Papers 20912, Hamburg University, Department of Economics.
  • Handle: RePEc:ham:qmwops:20912
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    File URL: http://www.uni-hamburg.de/fachbereiche-einrichtungen/fb03/iwwt/makro/PaperHKtarget.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Currency Board Arrangement; Target Zone Model; Credibility; Hong Kong;
    All these keywords.

    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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