A soft edge target zone model: theory and application to Hong Kong

Yu-Fu Chen, Michael Funke, Nicole Glanemann

    Research output: Working paperDiscussion paper

    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.
    Original languageEnglish
    Place of PublicationFinland
    PublisherBank of Finland
    ISBN (Print)9789524629973
    Publication statusPublished - 2009

    Publication series

    NameBOFIT Discussion Papers
    PublisherBank of Finland
    No.21/2009
    ISSN (Print)1456-4564
    ISSN (Electronic)1456-5889

    Keywords

    • Currency Board Arrangement
    • Target zone model
    • Credibility
    • Hong Kong

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