The Two-Pillar Policy for the RMB

Abstract

We document stylized facts about China's recent exchange rate policy for its currency, the Renminbi (RMB). Our empirical …ndings suggest that a "two-pillar policy" is in place, aiming to balance exchange rate ‡exibility and RMB index stability. Using derivatives data and a reduced-form no-arbitrage model, we assess …nancial market participants'view about the current exchange rate policy. Based on these empirical results, we develop a ‡exible-price monetary model for the RMB to evaluate the optimality of the two-pillar policy.