Optimal Exchange Rate Policy in a Growing Semi-Open Economy

Philippe Bacchetta, Kenza Benhima and Yannick Kalantzis

No 9666, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our main result is that in a growth acceleration episode it is optimal to have an initial real depreciation of the currency combined with an accumulation of reserves, which is consistent with the Chinese experience. This depreciation is followed by an appreciation in the long run. We also show that the optimal exchange rate path is close to the one that would result in an economy with full capital mobility and no central bank intervention.

Keywords: China; Exchange rate policy; International reserves (search for similar items in EconPapers)
JEL-codes: E58 F31 F41 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac, nep-mon, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Optimal Exchange Rate Policy in a Growing Semi-Open Economy (2014)
Working Paper: Optimal Exchange Rate Policy in a Growing Semi-Open Economy (2014)
Working Paper: Optimal Exchange Rate Policy in a Growing Semi-Open Economy (2014)
Working Paper: Optimal Exchange Rate Policy in a Growing Semi-Open Economy (2013)
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