How a Currency Board Fixes the Exchange Rate in a Crisis

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1、VeryPreliminaryDraftCommentsaremostwelcome!HowaCurrencyBoardFixestheExchangeRateinaCrisisYueMaLingnanUniversityShu-kiTsangHongKongBaptistUniversityDec.2002AbstractStandardexchangeratetheoriesthatarelargelymacroeconomicinorientationhavebeencriticizedforyieldinginsufficientexp

2、lanatoryandforecastingpower.Thispaperattemptstoprovideanalternativemodelofspotexchangeratedeterminationbaseddirectlyonthespecificsofmarketactivities.Itlooksatthebehavioroftwodifferentcampsintheforeignexchangemarket:thearbitrageursandthespeculators.Themodeliscastinsuchaframew

3、orkthatitisespeciallysuitableforprobingtheoperationsofcurrencyboardarrangements(CBAs),whichareheavilydependentonarbitrageefficiencyinlockingthespotexchangerate.11.IntroductionMacroeconomictheoryofexchangerate:ltheKeynesianmodels(Mundell,1963;Fleming,1962)lmonetarymodelswithf

4、lexibleprices(FrenkelandJohnson,1978)lstickyprices(Dornbusch,1976),lportfoliobalancemodels(BransonandHenderson,1985)ltargetzonemodels(e.g.Krugman,1991).Anemergingview:ðthemacroeconomicapproachmaynotbeveryfruitful.(Taylor,1995)Historicalandexistingexchangeratesystems:lfloatin

5、gratelfixedandsemi-fixedexchangeratesystems2(A)governmentinterventionsðforeignexchange(esp.capitalaccount)controls,e.g.ChinaandMalaysia;ðcentralbankinterventions(ERM).(B)market-drivenmechanism.ththðoldgoldstandardofthe19centuryandtheearly20centuryðcurrencyboardsystem:previou

6、sBritishcoloniesandalsoHongKong,Argentina,Estonia,andLithuaniaThispaperlexploresthemicrobehaviorofthearbitrageurandthespeculatorintheforeignexchangespotmarketfromanaccountingperspective(T-accountapproach)lexamshowthespotratecanbefixedthroughthearbitragemechanismintheðinterba

7、nkmarketðopenmarketlbuildsatheoreticalmodelofspotexchangeratebasedonarbitrageefficiency3Ourpaperservesthreepurposes:lprovidesanalternativeexplanationofðdeviationofthespotexchangeratefromitsfundamentalvalueinthecaseofafloatingexchangeratesystem,ðdeviationfromitsofficialcentra

8、lparityunderafixedexchangeratesystem.lpinpointsthedilemmafacedbythegovernme