Optimal Exchange Rate Policy in a Growing Semi-Open Economy

51 Pages Posted: 30 Sep 2013

See all articles by Philippe Bacchetta

Philippe Bacchetta

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

Kenza Benhima

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne); Centre for Economic Policy Research (CEPR)

Yannick Kalantzis

Banque de France

Multiple version iconThere are 3 versions of this paper

Date Written: September 2013

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.

Keywords: China, Exchange rate policy, International reserves

JEL Classification: E58, F31, F41

Suggested Citation

Bacchetta, Philippe and Benhima, Kenza and Kalantzis, Yannick, Optimal Exchange Rate Policy in a Growing Semi-Open Economy (September 2013). CEPR Discussion Paper No. DP9666, Available at SSRN: https://ssrn.com/abstract=2333584

Philippe Bacchetta (Contact Author)

University of Lausanne ( email )

Faculty of Business and Economics
Internef 523
1015 Lausanne
Switzerland

HOME PAGE: http://www.hec.unil.ch/pbacchetta/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Kenza Benhima

University of Lausanne - School of Economics and Business Administration (HEC-Lausanne) ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Yannick Kalantzis

Banque de France ( email )

Paris
France

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