The Model and Empirical Estimation of the Optimal Flexibility of RMB Exchange-Rate Regime: A Study Based on the Price-Stabilization

Xiaohui Liu () and Conglai Fan ()
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Xiaohui Liu: Chinese Finance Research Institute, Southwestern University of Finance and Economics,Chengdu 610074, China
Conglai Fan: School of Economics, Nanjing University, Nanjing 210093, China

Frontiers of Economics in China-Selected Publications from Chinese Universities, 2010, vol. 5, issue 2, 187-209

Abstract: Under the Mundell-Fleming-Dornbusch (M-F-D) framework, the paper develops a stochastic model to study the optimal choice of RMB exchange rate regime based on two objectives, namely the exchange rate stabilization and price stabilization. The paper finds that different policy objectives will lead to different optimal choices of RMB exchange-rate regime. If the central bank aims to stabilize the price level, the optimal choice would be a certain type of intermediate regime, or the optimal choice would be a fixed one if it aims to stabilize the RMB exchange rate. Based on the model, the paper empirically estimates China's open economy parameters and uses them to estimate the optimal flexibility of RMB exchange rate regime. The paper points out that China should allow more exchange rate changes to absorb its foreign exchange market pressure in order to stabilize the general price level, which indicates that China should move toward a more flexible exchange rate regime.

Keywords: exchange rate regime flexibility; price stabilization; exchange-rate stabilization; exchange market pressure (search for similar items in EconPapers)
JEL-codes: F33 F41 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (4)

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