Dynamic Transition of the Exchange Rate Regime in the People's Republic of China
Yoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon | April 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.
CitationYoshino, Naoyuki; Kaji, Sahoko; Asonuma, Tamon. 2014. Dynamic Transition of the Exchange Rate Regime in the People's Republic of China. © Asian Development Bank. http://hdl.handle.net/11540/3965. License: CC BY 3.0 IGO.
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