Dynamic Transition of the Exchange Rate Regime in the People's Republic of China

29 Pages Posted: 30 Apr 2014

See all articles by Naoyuki Yoshino

Naoyuki Yoshino

Asian Development Bank Institute

Sahoko Kaji

Keio University

Tamon Asonuma

International Monetary Fund Research Department

Date Written: April 29, 2014


This paper analyzes the optimal transition of the exchange rate regime in the People’s Republic of China (PRC). How the PRC can successfully reach the desired regime — whether a basket peg or floating regime — from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime.

Keywords: exchange rate regime, exchange rate adjustment, Chinese exchange rate regime, dynamic adjustment, transition path

JEL Classification: E42, F33, F41, F42

Suggested Citation

Yoshino, Naoyuki and Kaji, Sahoko and Asonuma, Tamon, Dynamic Transition of the Exchange Rate Regime in the People's Republic of China (April 29, 2014). ADBI Working Paper 476. Available at SSRN: https://ssrn.com/abstract=2431105 or http://dx.doi.org/10.2139/ssrn.2431105

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008

Sahoko Kaji

Keio University ( email )

2-15-45 Mita
Tokyo, 108-8345

Tamon Asonuma

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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