BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Off-the-record target zones: Theory with an application to Hong Kong's currency board
(), Michael Funke and Nicole Glanemann
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.
Keywords: Currency Board Arrangement; Target Zone Model; Hong Kong; (follow links to similar papers)
JEL-Codes: C61; E42; F31; F32; (follow links to similar papers)
31 pages, April 26, 2010
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