Optimal Exchange Rate Policy in a Growing Semi-Open Economy

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Serval ID
serval:BIB_CC79330EBB3B
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
Optimal Exchange Rate Policy in a Growing Semi-Open Economy
Journal
IMF Economic Review
Author(s)
Bacchetta P., Benhima K, Kalantzis Y.
ISSN
2041-4161
Publication state
Published
Issued date
04/2014
Peer-reviewed
Oui
Volume
62
Number
1
Pages
48-76
Language
english
Abstract
This paper considers an alternative perspective to China's exchange rate policy. It studies a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, it assumes limited financial development generating a large demand for saving instruments by the private sector. The paper analyzes the optimal exchange rate policy by modeling the central bank as a Ramsey planner. Its 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. The paper also shows 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.
Web of science
Open Access
Yes
Create date
03/06/2014 13:14
Last modification date
20/08/2019 15:47
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