A Trade Model with an Optimal Exchange Rate Motivated by Current Discussion of a Chinese Renminbi Float

24 Pages Posted: 31 May 2005

See all articles by Hui Huang

Hui Huang

Department of Economics, University of Waterloo

Yiming Wang

Peking University

Yi Wang

Shanghai University of Finance and Economics

John Whalley

University of Western Ontario - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute); Centre for International Governance and Innovation (CIGI)

Shunming Zhang

Xiamen University - School of Economics

Date Written: May 2005

Abstract

We combine a model of combined inter-spatial and inter-temporal trade between countries - recently used by Huang, Whalley and Zhang (2004) to analyze the merits of trade liberalization in services when goods trade is restricted - with a model of foreign exchange rationing due to Clarete and Whalley (1991) in which there is a fixed exchange rate with a surrender requirement for foreign exchange generated by exports. In this model, when services remain unliberalized there is an optimal trade intervention, even in the small open price-taking economy case. Given monetary policy and an endogenously determined premium value on foreign exchange, an optimal setting of the exchange rate can provide the optimal trade intervention. We suggest this model has relevance to the current situation in China where services remain unliberalized and tariff rates are bound in the WTO. Since there is an optimal exchange rate, a move to a free Renminbi float can be welfare-worsening. We use numerical simulation methods to explore the properties of the model, since it has no closed-form solution. Our analysis provides an intellectual counter argument to those presently advocating a free Renminbi float for China.

JEL Classification: F00, F11, F31, F4

Suggested Citation

Huang, Hui and Wang, Yiming and Wang, Yi and Whalley, John and Zhang, Shunming, A Trade Model with an Optimal Exchange Rate Motivated by Current Discussion of a Chinese Renminbi Float (May 2005). Available at SSRN: https://ssrn.com/abstract=730463

Hui Huang

Department of Economics, University of Waterloo ( email )

Department of Economics
University of Waterloo
Waterloo, Ontario N2L 3G1
Canada

Yiming Wang

Peking University

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China

Yi Wang

Shanghai University of Finance and Economics

777 Guoding Road
Shanghai, AK Shanghai 200433
China

John Whalley (Contact Author)

University of Western Ontario - Department of Economics ( email )

London, Ontario N6A 5B8
Canada
519-661-3509, ext. 83509 (Phone)
519-661-3666 (Fax)

HOME PAGE: http://www.ssc.uwo.ca/economics/faculty/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Centre for International Governance and Innovation (CIGI) ( email )

57 Erb Street West
Waterloo, Ontario N2L 6C2
Canada

Shunming Zhang

Xiamen University - School of Economics ( email )

Xiamen, Fujian 361005
China

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