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Dynamic Transition of the Exchange Rate Regime in the People’s Republic of China

Naoyuki Yoshino (), Sahoko Kaji and Tamon Asonuma ()

Macroeconomics Working Papers from East Asian Bureau of Economic Research

Abstract: 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.

Keywords: exchange rate regime; PRC; China; dollar-peg regime; basket-peg regime; floating regime; general equilibrium model (search for similar items in EconPapers)
JEL-codes: E42 F33 F41 F42 (search for similar items in EconPapers)
Date: 2014-04
New Economics Papers: this item is included in nep-cna, nep-mac, nep-mon, nep-opm and nep-tra
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