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New Estimation of China's Exchange Rate Regime

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  • Frankel, Jeffrey

    (Harvard University)

Abstract

The paper updates the answer to the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach to estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency. Since the RMB and many other currencies today purportedly follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing "exchange market pressure" to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the dollar's weight onto the euro. The implication is that the appreciation of the RMB against the dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp08-077.

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Date of creation: Dec 2008
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Handle: RePEc:ecl:harjfk:rwp08-077

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  1. Eiji Ogawa & Michiru Sakane, 2006. "The Chinese Yuan after the Chinese Exchange Rate System Reform," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 06019, Research Institute of Economy, Trade and Industry (RIETI).
  2. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1603-1635, August.
  3. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  4. Jeffrey A. Frankel & Shang-Jin Wei, 2007. "Assessing China's Exchange Rate Regime," NBER Working Papers 13100, National Bureau of Economic Research, Inc.
  5. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters, in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc.
  6. Frankel, Jeffrey & Wei, Shang-Jin, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of The Techniques for Inferring Flexibility and Basket Weights," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp08-026, Harvard University, John F. Kennedy School of Government.
  7. 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.
  8. 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.
  9. 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, CESifo, vol. 52(2), pages 246-275, June.
  10. Girton, Lance & Roper, Don, 1977. "A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience," American Economic Review, American Economic Association, American Economic Association, vol. 67(4), pages 537-48, September.
  11. 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, American Economic Association, vol. 93(4), pages 1173-1193, September.
  12. 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.
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