Assessing China's Exchange Rate Regime

Jeffrey Frankel and Shang-Jin Wei

No 13100, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines two related issues: (a) the implicit methodology used by the U.S. Treasury in determining whether China and America's other trading partners manipulate their exchange rates, and (b) the nature of the Chinese exchange rate regime since July 2005. On the first issue, we investigate the roles of economic variables consistent with the IMF definition of manipulation - the partners' overall current account/GDP, its reserve changes, and the real overvaluation of its currency - but also some variables suggestive of American domestic political considerations -- the bilateral trade balance, US unemployment, and an election year dummy. The econometric results suggest that the Treasury verdicts are driven heavily by the US bilateral deficit, though other variables also turn out to be quite important. On the issue of China's de facto exchange rate regime, we apply the technique introduced by Frankel and Wei (1994) to estimate implicit basket weights, adding several refinements. Within 2005, the de facto regime remained a peg to the dollar. However, there was a modest but steady increase in flexibility subsequently. We test whether US pressure has promoted RMB flexibility. We also test whether the recent appreciation against the dollar is due to a trend appreciation against the reference basket or a declining weight on the dollar in the reference basket, and suggest that they have different policy implications.

JEL-codes: F3 F59 O1 (search for similar items in EconPapers)
Date: 2007-05
New Economics Papers: this item is included in nep-cba, nep-cna, nep-ifn, nep-mon and nep-sea
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (74)

Published as Jeffrey A. Frankel & Shang-Jin Wei, 2007. "Assessing China's exchange rate regime," Economic Policy, CEPR, CES, MSH, vol. 22, pages 575-627, 07.

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