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Assessing China’s Exchange Rate Regime

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  • Frankel, Jeffrey A
  • Wei, Shang-Jin

Abstract

This paper examines two related issues: (a) the implicit methodology used by the U.S. Treasury in determining whether China and its 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 both 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 - and 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 and add 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 argue that they have different policy implications.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6264.

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Date of creation: Apr 2007
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Handle: RePEc:cpr:ceprdp:6264

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Keywords: Chinese economy; implicit currency weights; renminbi;

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References

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  1. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
  2. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  3. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
  4. Noland, Marcus, 1997. "Chasing Phantoms: The Political Economy of USTR," International Organization, Cambridge University Press, vol. 51(03), pages 365-387, June.
  5. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  6. Jeffrey Frankel, 2006. "On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," CESifo Economic Studies, CESifo, vol. 52(2), pages 246-275, June.
  7. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
  8. Jeffrey A. Frankel., 1993. "Foreign Exchange Policy, Monetary Policy and Capital Market Liberalization in Korea," Center for International and Development Economics Research (CIDER) Working Papers C93-008, University of California at Berkeley.
  9. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  10. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
  11. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  12. Ronald McKinnon & Gunther Schnabl, 2004. "The Return to Soft Dollar Pegging in East Asia. Mitigating Conflicted Virtue," International Finance 0406007, EconWPA, revised 07 Jul 2004.
  13. Takatoshi Ito & Anne O. Krueger, 1994. "Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3," NBER Books, National Bureau of Economic Research, Inc, number ito_94-1.
  14. Jeffrey A. Frankel & Shang-Jin Wei, 1993. "Emerging Currency Blocs," NBER Working Papers 4335, National Bureau of Economic Research, Inc.
  15. Frankel, Jeffrey, 2006. "Global Imbalances and Low Interest Rates: An Equilibrium Model vs. A Disequilibrium Reality," Working Paper Series rwp06-035, Harvard University, John F. Kennedy School of Government.
  16. Morris Goldstein & Nicholas R. Lardy, 2005. "China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity," Working Paper Series WP05-2, Peterson Institute for International Economics.
  17. Jeffrey A. Frankel, 1992. "Liberalization of Korea's foreign exchange markets," Pacific Basin Working Paper Series 92-08, Federal Reserve Bank of San Francisco.
  18. Jeffrey A. Frankel, 1992. "Is Japan creating a yen bloc in East Asia and the Pacific?," Pacific Basin Working Paper Series 92-09, Federal Reserve Bank of San Francisco.
  19. Benassy-Quere, Agnes & Coeure, Benoit & Mignon, Valerie, 2006. "On the identification of de facto currency pegs," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 112-127, March.
  20. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  21. Nouriel Roubini, 2007. "Why China Should Abandon Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 71-89, 03.
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