Optimal Exchange Rate Policy in a Growing Semi-Open Economy

Philippe Bacchetta, Kenza Benhima and Yannick Kalantzis

Working Papers from Hong Kong Institute for Monetary 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.

JEL-codes: E58 F31 F32 F38 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2014-05
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 (8)

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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 (2013)
Working Paper: Optimal Exchange Rate Policy in a Growing Semi-Open Economy (2013)
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