The Two-Pillar Policy for the RMB

49 Pages Posted: 26 Apr 2019

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Bin Wei

Federal Reserve Bank of Atlanta

Zhanwei Yue

Emory University; Federal Reserve Banks - Federal Reserve Bank of Atlanta

Multiple version iconThere are 2 versions of this paper

Date Written: 2019-04-01

Abstract

We document stylized facts about China's recent exchange rate policy for its currency, the renminbi (RMB). Our empirical findings suggest that a "two-pillar policy" is in place, aiming to balance RMB index stability and exchange rate flexibility. We then develop a tractable no-arbitrage model of the RMB under the two-pillar policy. Using derivatives data on the RMB and the U.S. dollar index, we estimate the model to assess financial markets' views about the fundamental exchange rate and sustainability of the policy. Our model is able to predict the modification of the two-pillar policy in May 2017, when a discretion-based "countercyclical factor" was introduced for the first time. We also examine the model's ability to forecast RMB movements.

Keywords: exchange rate policy, two-pillar policy, managed float, Chinese currency, renminbi, RMB, central parity, RMB index

JEL Classification: F31, G12, G13, G15

Suggested Citation

Jermann, Urban J. and Wei, Bin and Yue, Zhanwei, The Two-Pillar Policy for the RMB (2019-04-01). FRB Atlanta Working Paper No. 2019-8. Available at SSRN: https://ssrn.com/abstract=3378052 or http://dx.doi.org/10.29338/wp2019-08

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

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Bin Wei

Federal Reserve Bank of Atlanta ( email )

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Zhanwei Yue

Emory University ( email )

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United States

Federal Reserve Banks - Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
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