Optimal Exchange Rate Policy in a Growing Semi-Open Economy

Bacchetta, Philippe; Benhima, Kenza; Kalantzis, Yannick

doi:10.1057/imfer.2014.6

Cited by 6 publications

References 22 publications

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Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance

Wang

2020

Int. J Fin Econ

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This paper proposes an approach to correcting parameter misrepresentation under the dominance of a common factor, a customarily overlooked phenomenon. Meanwhile, it provides a general solution to a specific regression bias, namely coefficient correction for common factor dominance in econometrics, which is commonly encountered in the research on currency interactions and co-movements and beyond. The RMB basket weights are then scrutinized exhaustively, going through all stages of the evolving RMB regime and reforms. Correct and sensible currency basket weights are derived accordingly. It has been found that only the introduction of the central parity regime in 2015 has changed the RMB exchange rate patterns notably. The RMB market behavior and patterns virtually did not change during the prior reforms that had widened the band of daily fluctuation in the RMB exchange rate against the US dollar from 0.3% through to 2%, given the band's unique link to the US dollar.

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Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance

Wang

2020

Int. J Fin Econ

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Growing (with Capital Controls) like China

Song¹,

Storesletten²,

Zilibotti³

2014

IMF Econ Rev

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This paper explores the e¤ects of capital controls and policies regulating interest rates and the exchange rate in a model of economic transition applied to China. We build on Song et al. (2011) who construct a growth model consistent with salient features of the recent Chinese growth experience: high output growth, sustained returns on capital investment, extensive reallocation within the manufacturing sector, sluggish wage growth, and accumulation of a large trade surplus. The salient features of the theory are asymmetric …nancial imperfections and heterogeneous productivity across private and state-owned …rms. Capital controls and regulation of banks' deposit rates sti ‡es competition in the banking sector and mitigates the lending to productive private …rms. Removing this regulation would accelerate the growth in productivity and output. A temporarily undervalued exchange rate reduces real wages and consumption, stimulating investments in the high-productivity entrepreneurial sector. This fosters productivity growth and a trade surplus. A high interest rate limits the disadvantage of …nancially constrained …rms, reduces wages and increases the speed of transition from lowto high-productivity …rms.JEL Codes. F31, F41, F43, G21, O16, O53, P23.

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A Theory of Foreign Exchange Interventions

Fanelli

Straub

2021

The Review of Economic Studies

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We study a real small open economy with two key ingredients: (i) partial segmentation of home and foreign bond markets and (ii) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry-trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (a) the optimal policy leans against the wind, stabilizing the exchange rate; (b) it involves smooth spreads but allows exchange rates to jump; (c) it partly relies on “forward guidance”, with non-zero interventions even after the shock has subsided; (d) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

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Optimal Exchange Rate Policy in a Growing Semi-Open Economy

Cited by 6 publications

References 22 publications

Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance

Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance

Growing (with Capital Controls) like China

A Theory of Foreign Exchange Interventions

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