A “Time Series” Approach on the Chinese Exchange Rate Regime

Marco Mele

Economic Research-Ekonomska Istraživanja, 2010, vol. 23, issue 3, 1-11

Abstract: This paper deals with the issue of the exchange rate regime that China has established since 2005, when it announced a move away from the US dollar peg. In fact, from that date, the RMB was managed with reference to a basket of currencies rather than being pegged to the dollar; the exchange rate, therefore, became more flexible.But, though in the presence of basket peg, early econometric analysis (Shan-2005, Frankel & Wei-2006, Ogawa-2006, Yamazaky-2006) found that the assigned basket gave overwhelming weight to the dollar, and that the degree of flexibility had hardly increased at all.Almost all those studies used a technique introduced by Frankel in 1994 to estimate the weights in a currency basket: on one side regressed changes in the value of the local currency, in this case the RMB, while on the other one changes in the values of the dollar, the euro, the yen and other currencies that may be in the basket.Though there are numerous econometric techniques for estimating the exchange rate system, the technique proposed by Frankel is still the most widely used. However, in our opinion, this model has an error of autocorrelation among the variables, a factor that could lead the analysis to different results.Therefore, this work proposes a study on the Chinese exchange rate regime through an alternative econometric technique.

Date: 2010
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DOI: 10.1080/1331677X.2010.11517419

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