An Intertemporal Currency Board |
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Authors: | Alex Chan,& Nai-fu Chen |
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Affiliation: | The University of Hong Kong,;University of California Irvine, USA |
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Abstract: | The paper shows that the traditional wisdom of raising interest rates to defend a currency enriches rather than punishes the speculators. Furthermore, using high interest rates as a currency defense tool often produces the opposite effect in times of crisis. A new approach is proposed of using Hong Kong dollar "put" options as an explicit commitment by the government. The put option itself acts like an intertemporal currency board in keeping the linked exchange rate over time. This costly signaling produces a separating equilibrium that distinguishes the strength of the Hong Kong dollar from the other Asian currencies that were under pressure in 1997. |
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