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Assessing China’s Exchange Rate Regime

  • Frankel, Jeffrey A
  • Wei, Shang-Jin

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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  1. Frankel, Jeffrey A. & Wei, Shang-Jin, 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers 233209, University of California-Berkeley, Department of Economics.
  2. Frankel, Jeffrey A., 1993. "Foreign Exchange Policy, Monetary Policy and Capital Market Liberalization in Korea," Center for International and Development Economics Research (CIDER) Working Papers 233181, University of California-Berkeley, Department of Economics.
  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. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 301-352.
  5. Jeffrey A. Frankel & Shang-Jin Wei, 1992. "Yen bloc or dollar bloc: exchange rate policies of the East Asian economies," Pacific Basin Working Paper Series 93-01, Federal Reserve Bank of San Francisco.
  6. 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.
  7. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  8. Marcus Noland, 1997. "Chasing Phantoms: The Political Economy of USTR," Working Paper Series WP97-1, Peterson Institute for International Economics.
  9. 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.
  10. 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.
  11. 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.
  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. Jeffrey A. Frankel., 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," Center for International and Development Economics Research (CIDER) Working Papers C93-007, University of California at Berkeley.
  14. Jeffrey A. Frankel, 1992. "Liberalization of Korea's foreign exchange markets," Pacific Basin Working Paper Series 92-08, Federal Reserve Bank of San Francisco.
  15. Morris Goldstein, 2004. "Adjusting China's Exchange Rate Policies," Working Paper Series WP04-1, Peterson Institute for International Economics.
  16. 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.
  17. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  18. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
  19. Nouriel Roubini, 2007. "Why China Should Abandon Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 71-89, 03.
  20. Richard N. Cooper, 2005. "Living with Global Imbalances: A Contrarian View," Policy Briefs PB05-03, Peterson Institute for International Economics.
  21. 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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