The Two‐Pillar Policy for the RMB

Urban Jermann, Bin Wei and Vivian Yue

Journal of Finance, 2022, vol. 77, issue 6, 3093-3140

Abstract: This paper studies China's recent exchange rate policy for the renminbi (RMB). We demonstrate empirically that a two‐pillar policy is in place, aiming to balance exchange rate flexibility and RMB index stability via market and basket pillars. We further extend and validate the formulation that incorporates the so‐called countercyclical factor. Theoretically, we develop a flexible‐price monetary model for the RMB in which the two‐pillar policy arises endogenously as an optimal response of the government. We estimate the model by generalized method of moments and quantitatively assess various policy trade‐offs.

Date: 2022
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https://doi.org/10.1111/jofi.13178

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Working Paper: The Two-Pillar Policy for the RMB (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:6:p:3093-3140

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