BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 21/2009:
A soft edge target zone model: Theory and application to Hong Kong
Yu-Fu Chen ()
, Michael Funke and 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.
Keywords: currency board arrangement; target zone model; credibility; Hong Kong; (follow links to similar papers)
JEL-Codes: C61; E42; F31; F32; (follow links to similar papers)
25 pages, November 21, 2009
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