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Optimal Exchange Rate Policy in a Growing Semi-Open Economy

Author

Listed:
  • Philippe Bacchetta

    (University of Lausanne; Centre for Economic Policy Research (CEPR); Swiss Finance Institute)

  • Kenza Benhima

    (University of Lausanne)

  • Yannick Kalantzis

    (Banque de France)

Abstract
In this paper, we consider an alternative perspective to China's exchange rate policy. We study a semi-open economy where the private sector has no access to international capital markets but the central bank has full access. Moreover, we assume limited financial development generating a large demand for saving instruments by the private sector. We analyze the optimal exchange rate policy by modelling the central bank as a Ramsey planner. Our 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. We also show 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.

Suggested Citation

  • Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2014. "Optimal Exchange Rate Policy in a Growing Semi-Open Economy," Swiss Finance Institute Research Paper Series 14-34, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1434
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    References listed on IDEAS

    as
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. China is doing is right with managing its exchange rate
      by Economic Logician in Economic Logic on 2013-11-11 23:24:00

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    Cited by:

    1. Philippe Bacchetta & Kenza Benhima & Yannick Kalantzis, 2013. "Capital Controls with International Reserve Accumulation: Can This Be Optimal?," American Economic Journal: Macroeconomics, American Economic Association, vol. 5(3), pages 229-262, July.
    2. Rod Tyers & Ying Zhang, 2014. "Real exchange rate determination and the China puzzle," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 28(2), pages 1-32, November.
    3. Vincent Bodart & François Courtoy & Erica Perego, 2021. "World Interest Rates and Macroeconomic Adjustments in Developing Commodity Producing Countries," Working Papers 2021-01, CEPII research center.
    4. Rick van der Ploeg, 2014. "Guidelines for exploiting natural resource wealth," Oxford Review of Economic Policy, Oxford University Press, vol. 30(1), pages 145-169.

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    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls

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