A Target-Zone Model with Two Types of Assets

16 Pages Posted: 31 Dec 2010

See all articles by Yue Ma

Yue Ma

City University of Hong Kong (CityU) - Department of Economics & Finance

Shu-ki Tsang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law - Department of Economics

Matthew S. Yiu

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR)

Wai-Yip Alex Ho

Hong Kong Monetary Authority

Date Written: December 30, 2010

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.

Keywords: Target Zone, Uncovered Interest Rate Parity

JEL Classification: E42, G14

Suggested Citation

Ma, Yue and Tsang, Shu-ki and Yiu, Matthew S. and Ho, Wai-Yip Alex, A Target-Zone Model with Two Types of Assets (December 30, 2010). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No.30/2010, Available at SSRN: https://ssrn.com/abstract=1732343 or http://dx.doi.org/10.2139/ssrn.1732343

Yue Ma (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

Shu-ki Tsang

Hong Kong Baptist University (HKBU) – Department of Accountancy and Law - Department of Economics ( email )

China

Matthew S. Yiu

Hong Kong Monetary Authority - Hong Kong Institute for Monetary Research (HKIMR) ( email )

55/F Two IFC
8 Finance Street, Central
Hong Kong, HK
China
+852 2878 1974 (Phone)
+852 2878 7006 (Fax)

Wai-Yip Alex Ho

Hong Kong Monetary Authority ( email )

Hong Kong Monetary Authority
55/F, 2 International Finance Centre, 8 Finance St
Central
Hong Kong

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