The Two-Pillar Policy for the RMB

Urban Jermann, Bin Wei and Vivian Yue

No 2019-8, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We document stylized facts about China's recent exchange rate policy for its currency, the renminbi (RMB). Our empirical findings suggest that a \"two-pillar policy\" is in place, aiming to balance RMB index stability and exchange rate flexibility. We then develop a tractable no-arbitrage model of the RMB under the two-pillar policy. Using derivatives data on the RMB and the U.S. dollar index, we estimate the model to assess financial markets' views about the fundamental exchange rate and sustainability of the policy. Our model is able to predict the modification of the two-pillar policy in May 2017, when a discretion-based \"countercyclical factor\" was introduced for the first time. We also examine the model's ability to forecast RMB movements.

Keywords: exchange rate policy; two-pillar policy; managed float; Chinese currency; renminbi; RMB; central parity; RMB index (search for similar items in EconPapers)
JEL-codes: F31 G12 G13 G15 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2019-04-01
New Economics Papers: this item is included in nep-cba, nep-cna, nep-mon 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: The Two‐Pillar Policy for the RMB (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedawp:2019-08

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DOI: 10.29338/wp2019-08

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