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A Target-Zone Model with Two Types of Assets

Author

Listed:
  • Yue Ma

    (Lingnan University, Hong Kong and Hong Kong Institute for Monetary Research)

  • Shu-ki Tsang

    (Hong Kong Baptist University and Hong Kong Institute for Monetary Research)

  • Matthew S. Yiu

    (Hong Kong Monetary Authority)

  • Wai-Yip Alex Ho

    (Hong Kong Monetary Authority)

Abstract

This paper extends the single-asset target-zone model pioneered by Krugman (1991) to include both bonds and equities. The new model provides a convenient framework for investigating a 'puzzle' recently noted in Hong Kong. While the economy has experienced persistently lower interest rates relative to the US, it has been able to maintain a stable peg between the Hong Kong dollar and the US counterpart under an environment of free capital flows. This is in apparent contradiction with the 'impossibility trinity' in the theory of international finance. Our modified analytical structure presents a plausible route to a meaningful answer to the 'conundrum' and hopefully yields a certain degree of theoretical generality.

Suggested Citation

  • Yue Ma & Shu-ki Tsang & Matthew S. Yiu & Wai-Yip Alex Ho, 2010. "A Target-Zone Model with Two Types of Assets," Working Papers 302010, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:302010
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    File URL: http://www.hkimr.org/uploads/publication/80/ub_full_0_2_263_wp-no-30_2010-final-.pdf
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    References listed on IDEAS

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    1. repec:zbw:bofitp:2009_021 is not listed on IDEAS
    2. Ma, Yue & Kanas, Angelos, 2000. "Testing for a nonlinear relationship among fundamentals and exchange rates in the ERM," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 135-152, February.
    3. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(3), pages 689-712.
    4. Mark, Nelson C & Wu, Yangru, 1998. "Rethinking Deviations from Uncovered Interest Parity: The Role of Covariance Risk and Noise," Economic Journal, Royal Economic Society, vol. 108(451), pages 1686-1706, November.
    5. Chen, Yu-Fu & Funke, Michael & Glanemann, Nicole, 2009. "A Soft Edge Target Zone Model: Theory And Application To Hong Kong," SIRE Discussion Papers 2009-61, Scottish Institute for Research in Economics (SIRE).
    6. Michael Funke & Yu-Fu Chen & Nicole Glanemann, 2009. "A soft target zone model: Theory and application to Hong Kong," Quantitative Macroeconomics Working Papers 20912, Hamburg University, Department of Economics.
    7. Tsang, Shu-ki & Ma, Yue, 2002. "Currency substitution and speculative attacks on a currency board system," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 53-78, February.
    8. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(3), pages 669-682.
    9. Matthew S. Yiu & Wai-Yip Alex Ho & Yue Ma & Shu-Ki Tsang, 2010. "An Analytical Framework for the Hong Kong Dollar Exchange Rate Dynamics under Strong Capital Inflows," Working Papers 1005, Hong Kong Monetary Authority.
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    Cited by:

    1. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    2. K. Kupoluyi, Adewale & A. Awotunde, Taiye & Abubakar, Abdulrahman, 2017. "The Imperatives Of Comparative Public Administration And New Public Management In A Changing Global Environment," Ilorin Journal of Business and Social Sciences, Faculty of Social Sciences, University of Ilorin, vol. 19(1), pages 55-71, October.
    3. Matthew S. Yiu & Wai-Yip Alex Ho & Yue Ma & Shu-Ki Tsang, 2010. "An Analytical Framework for the Hong Kong Dollar Exchange Rate Dynamics under Strong Capital Inflows," Working Papers 1005, Hong Kong Monetary Authority.

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    More about this item

    Keywords

    Target Zone; Uncovered Interest Rate Parity;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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