IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

The difficulties of the Chinese and Indian exchange rate regimes

  • Ila Patnaik

    (NIPFP)

  • Ajay Shah

China and India have both attempted distorting the exchange rate in order to foster exports-led growth. This is described as the Bretton Woods II framework, where developing countries buy bonds in the US and keep undervalued exchange rates, in order to foster export-led growth. The costs and benefits of this approach need to factor in the extent to which monetary policy is distorted by the pursuit of exchange rate policy. In this paper, we start by identifying dates of structural change, and the characteristics of the de facto exchange rate regime, for both countries. These results utilise recent developments in the econometrics of structural change. We then examine business cycle conditions and the short-term rate (expressed in real terms) in both India and China. We find that through the great business cycle boom of the early 2000s, both countries followed expansionary monetary policy. This is consistent with the idea that de facto exchange rate pegging induces a loss of monetary policy autonomy. By following expansionary monetary policy at a time of buoyant business cycle conditions, in both countries, monetary policy contributed to exacerbating instability of GDP; it helped exacerbate both boom and bust. Capital flows and conditions on currency markets changed profoundly from late 2007 onwards. Hence, this paper is primarily focused on the period from 1998 till 2007, the period where both countries were trying to use monetary policy to obtain exchange rate undervaluation. These difficulties need to be brought into the assessment of the Bretton Woods II regime.

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.eaber.org/node/22975
Download Restriction: no

Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22975.

as
in new window

Length:
Date of creation: Jan 2009
Date of revision:
Handle: RePEc:eab:macroe:22975
Contact details of provider: Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
Web page: http://www.eaber.org

More information through EDIRC

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. Frankel, Jeffrey A & Wei, Shang-Jin, 2007. "Assessing China’s Exchange Rate Regime," CEPR Discussion Papers 6264, C.E.P.R. Discussion Papers.
  2. Takatoshi Ito & Anne O. Krueger, 1994. "Introduction to "Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3"," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 1-5 National Bureau of Economic Research, Inc.
  3. Prasad, Eswar S., 2009. "Is the Chinese growth miracle built to last?," China Economic Review, Elsevier, vol. 20(1), pages 103-123, March.
  4. Jeffrey A. Frankel, 2009. "New Estimation of China's Exchange Rate Regime," NBER Working Papers 14700, National Bureau of Economic Research, Inc.
  5. Kochhar, Kalpana & Kumar, Utsav & Rajan, Raghuram & Subramanian, Arvind & Tokatlidis, Ioannis, 2006. "India's pattern of development: What happened, what follows?," Journal of Monetary Economics, Elsevier, vol. 53(5), pages 981-1019, July.
  6. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  7. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  8. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  9. Joshua Aizenman & Reuven Glick, 2008. "Sterilization, Monetary Policy, and Global Financial Integration," NBER Working Papers 13902, National Bureau of Economic Research, Inc.
  10. S. Mahendra Dev, 2008. "India," Chapters, in: Handbook on the South Asian Economies, chapter 1 Edward Elgar.
  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, vol. 93(4), pages 1173-1193, September.
  12. Bhattacharya, Rudrani & Patnaik, Ila & Shah, Ajay, 2008. "Early warnings of inflation in India," Working Papers 08/54, National Institute of Public Finance and Policy.
  13. GAULIER, Guillaume & LEMOINE, Francoise & UNAL-KESENCI, Deniz, 2007. "China's emergence and the reorganisation of trade flows in Asia," China Economic Review, Elsevier, vol. 18(3), pages 209-243.
  14. Ronald McKinnon & Gunther Schnabl, 2009. "China's financial conundrum and global imbalances," BIS Working Papers 277, Bank for International Settlements.
  15. Zeileis, Achim & Shah, Ajay & Patnaik, Ila, 2010. "Testing, monitoring, and dating structural changes in exchange rate regimes," Computational Statistics & Data Analysis, Elsevier, vol. 54(6), pages 1696-1706, June.
  16. Nouriel Roubini, 2007. "Why China Should Abandon Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 71-89, 03.
  17. 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, May.
Full references (including those not matched with items on IDEAS)

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

When requesting a correction, please mention this item's handle: RePEc:eab:macroe:22975. 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: (Shiro Armstrong)

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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.