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

Kang Chen and Chang Yee Kwan

The World Economy, 2015, vol. 38, issue 6, 1006-1014

Abstract: type="main" xml:id="twec12233-abs-0001">

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.

Date: 2015
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