Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China

Eswar Prasad, Qing Wang and Thomas Rumbaugh

No 2005/001, IMF Policy Discussion Papers from International Monetary Fund

Abstract: This paper reviews the issues involved in moving towards greater exchange rate flexibility and capital account liberalization in China. A more flexible exchange rate regime would allow China to operate a more independent monetary policy, providing a useful buffer against domestic and external shocks. At the same time, weaknesses in China’s financial system suggest that capital account liberalization poses significant risks and should be a lower priority in the short term. This paper concludes that greater exchange rate flexibility is in China’s own interest and that, along with a more stable and robust financial system, it should be regarded as a prerequisite for undertaking a substantial liberalization of the capital account.

Keywords: PDP; exchange rate; nominal exchange rate; China; Capital controls; exchange rate regime; financial sector reforms; foreign currency; exchange rate appreciation; exchange rate volatility; transmission mechanism; controls in China; capital account control; exchange rate flexibility debate; rigid exchange rate regime; capital account restriction; undervalued exchange rate; capital controls in China; Exchange rate flexibility; Exchange rate arrangements; Capital account liberalization; Capital account; Global (search for similar items in EconPapers)
Pages: 32
Date: 2005-01-01
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Citations: View citations in EconPapers (107)

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