How are Exchange Rates Managed? Evidence of an Anchor‐Based Heuristic

9 Pages Posted: 22 Jun 2015

See all articles by Kang Chen

Kang Chen

National University of Singapore (NUS) - Lee Kuan Yew School of Public Policy

Chang Yee Kwan

Independent

Date Written: June 2015

Abstract

Central banks often intervene in the foreign exchange market to obtain desirable exchange rates. How this is done has remained totally opaque although central banks are likely to adopt a satisficing rather than optimizing strategy as they need to intervene frequently in a timely manner under incomplete information. In this paper, we propose a simple exchange rate management rule that spreads the volatilities originated from the anchor currencies among the exchange rates with the domestic currency. We test out this rule on 10 currencies and find the empirical evidence consistent with the proposed anchor‐based heuristic.

Suggested Citation

Chen, Kang and Kwan, Chang Yee, How are Exchange Rates Managed? Evidence of an Anchor‐Based Heuristic (June 2015). The World Economy, Vol. 38, Issue 6, pp. 1006-1014, 2015. Available at SSRN: https://ssrn.com/abstract=2621102 or http://dx.doi.org/10.1111/twec.12233

Kang Chen (Contact Author)

National University of Singapore (NUS) - Lee Kuan Yew School of Public Policy ( email )

Singapore 117591
Singapore

Chang Yee Kwan

Independent ( email )

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