Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200546
Authors: 
Jermann, Urban J.
Wei, Bin
Yue, Vivian Z.
Year of Publication: 
2019
Series/Report no.: 
Working Paper No. 2019-8
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.
Subjects: 
exchange rate policy
two-pillar policy
managed float
Chinese currency
renminbi
RMB
central parity
RMB index
JEL: 
F31
G12
G13
G15
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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