Exchange rate dynamics under a currency board when policy rates are zero
Publication in refereed journal



摘要In a target-zone exchange rate system, both fundamentals and exchange rate expectations,
reflected in interest rate differentials between domestic and anchor currencies, determine the
exchange rate. However, scope for exchange rate expectation is limited when policy rates are
close to the zero lower bound, in particular in a narrow-band target zone or currency board.
Cook and Yetman (2014) introduce a new mechanism, based on a central bank’s balance
sheet, which works to bring about equilibrium in currency markets even when interest rates
are zero. To investigate how interest rate differentials and a central bank’s balance sheet
(monetary base) affect exchange rate dynamics, this paper uses a target-zone model with an
asymmetric mean-reverting fundamental dynamics. This model is tested on data for the
Hong Kong dollar (HKD), which is pegged with the US dollar (USD), under a zero-interest
rate environment. The empirical results suggest that the restoring force and long-term mean
of the exchange rate dynamics are cointegrated with the monetary base, as well as HKD-USD
interest rate differentials. Appreciation expectations of the HKD are reflected in the dynamics
and are found to be positively (negatively) related to capital inflows (interest rate
著者Cho-Hoi Hui, Ka-Fai Li, Chi-Fai Lo
期刊名稱Hong Kong Institute For Monetary Research Working Paper Series

上次更新時間 2018-27-11 於 15:35