Advanced Search
MyIDEAS: Login to save this paper or follow this series

China’s new exchange rate regime, optimal basket currency and currency diversification

Contents:

Author Info

  • Zhang, Zhichao

    ()
    (BOFIT)

  • Shi, Nan

    (BOFIT)

  • Zhang, Xiaoli

    (BOFIT)

Abstract

We build an optimising framework to analyse a class of economies that adopt an ECU-type basket currency while in transition to increased flexibility of the exchange rate regime. Instead of conventional basket pegging, such an economy uses an ECU-type currency index as a benchmark for monitoring and assessing exchange rate movements. This provides an anchoring device for the nations exchange rate regime and allows the home currencys exchange rate to fluctuate. Under the assumption that the central bank is chiefly interested in maintaining stability, the optimal structure of the basket currency is based on its contribution to minimizing the volatility of the countrys external account. A currency invariance index is applied to capture the effect of the countrys exit from exclusive linkage with the US dollar. The approach is illustrated by Chinese exchange rate policy. We find it advisable and viable for China to form a basket currency with a diversified portfolio of currencies. While the portfolios weighting scheme could favour the dollar, euro and Japanese yen, we show that the composition of the basket is open to a wide range of possibilities. Moreover, contrary to general fears, there is considerable potential for China to engage in currency diversification, which will not necessarily affect the dollars position.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.suomenpankki.fi/bofit_en/tutkimus/tutkimusjulkaisut/dp/Documents/DP1911.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 19/2011.

as in new window
Length: 36 pages
Date of creation: 22 Aug 2011
Date of revision:
Handle: RePEc:hhs:bofitp:2011_019

Contact details of provider:
Postal: Bank of Finland, BOFIT, P.O. Box 160, FI-00101 Helsinki, Finland
Phone: + 358 10 831 2268
Fax: + 358 10 831 2294
Email:
Web page: http://www.suomenpankki.fi/bofit_en/
More information through EDIRC

Related research

Keywords: basket currency; currency diversification; China;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Michael P. Dooley & J. Saul Lizondo & Donald J. Mathieson, 1989. "The Currency Composition of Foreign Exchange Reserves," IMF Staff Papers, Palgrave Macmillan, vol. 36(2), pages 385-434, June.
  2. Zhang, Zhichao & Shi, Nan & Zhang, Xiaoli, 2011. "China’s new exchange rate regime, optimal basket currency and currency diversification," MPRA Paper 32642, University Library of Munich, Germany.
  3. James Laurenceson, . "China�s exchange rate policy: the case against abandoning the dollar peg," EAERG Discussion Paper Series 0105, School of Economics, University of Queensland, Australia.
  4. Habib, Maurizio Michael & Stráský, Jan, 2008. "Oil exporters: in search of an external anchor," Working Paper Series 0958, European Central Bank.
  5. Jeffrey A. Frankel, 2009. "New Estimation of China's Exchange Rate Regime," NBER Working Papers 14700, National Bureau of Economic Research, Inc.
  6. Victor Pontines, 2009. "Optimal common currency basket in East Asia," Applied Economics Letters, Taylor & Francis Journals, vol. 16(11), pages 1139-1141.
  7. Edison, Hali J & Vardal, Erling, 1990. " Optimal Currency Baskets for Small, Developed Economies," Scandinavian Journal of Economics, Wiley Blackwell, vol. 92(4), pages 559-71.
  8. Joseph Daniels & Peter G. Toumanoff & Marc von der Ruhr, 2001. "Optimal Currency Basket Pegs for Developing and Emerging Economies," Working Papers and Research 0103, Marquette University, Center for Global and Economic Studies and Department of Economics.
  9. Jeffrey A. Frankel & Daniel Xie, 2009. "Estimation of De Facto Flexibility Parameter and Basket Weights in Evolving Exchange Rate Regimes," NBER Working Papers 15620, National Bureau of Economic Research, Inc.
  10. Jarko Fidrmuc, 2010. "Time-Varying Exchange Rate Basket in China from 2005 to 2009," Comparative Economic Studies, Palgrave Macmillan, vol. 52(4), pages 515-529, December.
  11. Graham Bird & Ramkishen Rajan, 2002. "Optimal currency baskets and the third currency phenomenon: exchange rate policy in Southeast Asia," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(8), pages 1053-1073.
  12. Ariel M. Viale & James W. Kolari & Nikolai V. Hovanov & Mikhail V. Sokolov, 2008. "Computing and testing a stable common currency for Mercosur countries," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 193-220, May.
  13. John Williamson, 2000. "Exchange Rate Regimes for Emerging Markets: Reviving the Intermediate Option," Peterson Institute Press: All Books, Peterson Institute for International Economics, number pa60.
  14. Michael Funke & Marc Gronwald, 2008. "The undisclosed Renminbi Basket: are the markets telling us something about where the Renminbi - US Dollar Exchange Rate is going?," Quantitative Macroeconomics Working Papers 20812b, Hamburg University, Department of Economics.
  15. Girardin Eric & Steinherr Alfred, 2009. "Regional Monetary Units for East Asia: Lessons from Europe," Working Papers id:1972, eSocialSciences.
  16. Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
  17. Laurenceson, J. & Qin, F., 2005. "China's Exchange Rate Policy: The Case Against Abandoning the Dollar PEG," Discussion Paper 2005-70, Tilburg University, Center for Economic Research.
  18. Hali J. Edison & Erling Vardal, 1985. "Optimal currency basket in a world of generalized floating : an application to the nordic countries," International Finance Discussion Papers 266, Board of Governors of the Federal Reserve System (U.S.).
  19. Connolly, Michael, 1982. "The choice of an optimum currency peg for a small, open country," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 153-164, January.
  20. Hovanov, Nikolai V. & Kolari, James W. & Sokolov, Mikhail V., 2007. "Synthetic money," International Review of Economics & Finance, Elsevier, vol. 16(2), pages 161-168.
  21. Barry J. Eichengreen & Donald J. Mathieson, 2000. "The Currency Composition of Foreign Exchange Reserves," IMF Working Papers 00/131, International Monetary Fund.
  22. Han, Hsiang-Ling, 2000. "Choice of currency basket weights and its implications on trade balance," International Review of Economics & Finance, Elsevier, vol. 9(4), pages 323-350, October.
  23. Hovanov, Nikolai V. & Kolari, James W. & Sokolov, Mikhail V., 2004. "Computing currency invariant indices with an application to minimum variance currency baskets," Journal of Economic Dynamics and Control, Elsevier, vol. 28(8), pages 1481-1504, June.
  24. Leslie Lipschitz & V. Sundararajan, 1980. "The Optimal Basket in a World of Generalized Floating (Panier optimal de monnaies dans un monde caractérisé par le flottement généralisé des taux de change) (La cesta óptima en un mu," IMF Staff Papers, Palgrave Macmillan, vol. 27(1), pages 80-100, March.
  25. Ronald McKinnon, 2006. "China's Exchange Rate Trap: Japan Redux?," American Economic Review, American Economic Association, vol. 96(2), pages 427-431, May.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Zhang, Zhichao & Shi, Nan & Zhang, Xiaoli, 2011. "China’s new exchange rate regime, optimal basket currency and currency diversification," BOFIT Discussion Papers 19/2011, Bank of Finland, Institute for Economies in Transition.
  2. Yoshino, Naoyuki & Kaji, Sahoko & Tamon, Asonuma, 2014. "Dynamic Transition of the Exchange Rate Regime in the People’s Republic of China," ADBI Working Papers 476, Asian Development Bank Institute.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:hhs:bofitp:2011_019. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Päivi Määttä).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.