Dynamic transition of exchange rate regime in China

Naoyuki Yoshino, Sahoko Kaji, Tamon Asonuma

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

The paper considers the optimal transition path for China's exchange rate regime. How can China successfully make the shift from the current dollar peg regime to a more desirable regime, whether a basket peg or a floating regime? To answer this question, we develop a dynamic small open economy general equilibrium model. We construct four transition policies based on a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the dollar peg regime. Two main results are derived from the quantitative analysis using Chinese data from 1999Q1 to 2010Q4. First, following a gradual adjustment to a basket peg regime is the most appropriate path for China to take, with minimal welfare losses associated with the shift in the exchange rate regime. Second, a sudden shift to the basket peg is the second best solution, and is superior to a sudden shift to floating because the monetary authority can efficiently determine optimal weights to attach to currencies in the basket to achieve policy goals once they adopt a basket peg regime.

Original languageEnglish
Pages (from-to)36-55
Number of pages20
JournalChina and World Economy
Volume22
Issue number3
DOIs
Publication statusPublished - 2014 Jan 1

Keywords

  • Chinese exchange rate regime
  • Chinese renminbi
  • Dynamic adjustment
  • Transition path

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)

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