Dynamic Transition of Exchange Rate Regime in China

20 Pages Posted: 15 May 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: July/August 2014

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.

Keywords: Chinese renminbi, 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 Exchange Rate Regime in China (July/August 2014). China & World Economy, Vol. 22, Issue 3, pp. 36-55, 2014. Available at SSRN: https://ssrn.com/abstract=2437164 or http://dx.doi.org/10.1111/j.1749-124X.2014.12067.x

Naoyuki Yoshino (Contact Author)

Asian Development Bank Institute ( email )

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

Sahoko Kaji

Keio University ( email )

2-15-45 Mita
Minato-ku
Tokyo, 108-8345
Japan

Tamon Asonuma

International Monetary Fund Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

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