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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 ()
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Sahoko Kaji: Asian Development Bank Institute

No 476, ADBI Working Papers from Asian Development Bank Institute

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; exchange rate adjustment; Chinese exchange rate regime; dynamic adjustment; transition path (search for similar items in EconPapers)
JEL-codes: E42 F33 F41 F42 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-04-29
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon, nep-opm and nep-tra
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