Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China

IMF Policy Discussion Paper No. 05/1

32 Pages Posted: 19 Apr 2005

See all articles by Eswar S. Prasad

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics; Cornell SC Johnson College of Business

Thomas Rumbaugh

International Monetary Fund (IMF)

Qing Wang

International Monetary Fund (IMF)

Date Written: January 2005

Abstract

This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China's financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China's own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.

Keywords: Capital controls, exchange rate regime, financial sector weaknesses

JEL Classification: F3, F4, E6

Suggested Citation

Prasad, Eswar S. and Rumbaugh, Thomas and Wang, Qing, Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China (January 2005). IMF Policy Discussion Paper No. 05/1, Available at SSRN: https://ssrn.com/abstract=701273 or http://dx.doi.org/10.2139/ssrn.701273

Eswar S. Prasad (Contact Author)

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Thomas Rumbaugh

International Monetary Fund (IMF) ( email )

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Qing Wang

International Monetary Fund (IMF) ( email )

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Washington, DC 20431
United States

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