Optimal Renminbi Exchange Rate Policy under Depreciation Anticipation

Mei Li

No 1805, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: We establish formal models to study optimal foreign exchange intervention policy for a currency under depreciation pressure when a central bank aims both to discourage speculative capital flows and to reduce exchange rate misalignment. In particular, we study two cases where speculators have complete and incomplete information about the central bank’s long-run equilibrium exchange rate target and arrive at the following results: (1) With complete information, the central bank is better off pre-committing to a specific exchange rate level than deciding it discretionarily. (2) With incomplete information, the central bank cannot credibly reveal its exchange rate target to speculators through “cheap talk”. (3) With incomplete information, any action taken by the central bank will send a signal to speculators about the central bank’s preferences, causing a change in the speculators’ beliefs and subsequently in capital flows.

Keywords: foreign exchange intervention; depreciation anticipation; renminbi exchange rate (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2018
New Economics Papers: this item is included in nep-cba and nep-mon
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.uoguelph.ca/economics/repec/workingpapers/2018/2018-05.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2018-05

Access Statistics for this paper

More papers in Working Papers from University of Guelph, Department of Economics and Finance Contact information at EDIRC.
Bibliographic data for series maintained by Stephen Kosempel ().