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【IMI Working Paper No. 2213 [EN]】"Wait and See" or "Fear of Floating"?

发布日期:2022-06-21来源:

【Abstract】

This paper studies the evolution of China’s exchange rate policy using real options theory. With intervention costs and ongoing uncertainty, intervention involves the exercise of an option. Increased uncertainty increases the value of this option. This “wait and see” effect leads the Central Bank to widen its intervention band. However, increased volatility also produces larger fluctuations in welfare, which creates a “fear of floating.” This induces the Central Bank to set a tighter band. To study this trade-off, our paper incorporates stochastic volatility into a new Keynesian target zone model and then calibrates it to data from China. We find that increased uncertainty leads to a tighter intervention band, both in the data and in the model. Hence, in China, “fear of floating” appears to dominate the “wait and see” effect.

【Keywords】

Exchange Rate, Target Zone, Option Value, Stochastic Volatility

【Authors】

Lei Xiaowen, University of Oxford

Lu Dong, Research Fellow of IMI, School of Finance, Renmin University of China

Kenneth Kasa, Simon Fraser University


上一篇:【IMI Working Papers NO.2217】数字普惠金融如何助力乡村振兴:基于产业发展的视角 下一篇:【IMI Working Paper No. 2212 [EN]】Global Financial Conditions, Capital Flows and the Exchange Rate Regime in Emerging Market Economies

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