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Adjusting China's Exchange Rate Policies

  • Morris Goldstein

    ()

    (Institute for International Economics)

In this paper the author argues that China's exchange rate policy is seriously flawed given its current macroeconomic circumstances and its longer-term policy objectives. The main conclusions are the following: (i) the RMB is significantly under-valued; (ii) China has been "manipulating" its currency, contrary to the IMF rules of the game; (iii) it is in China's own interest, as well as in the interest of the international community, for China to initiate an appreciation of the RMB soon; and (iv) China should neither stand pat with its existing currency regime nor opt for a freely floating RMB and completely open capital markets. Instead, China should undertake a "two step" currency reform. Step one would involve a switch from a unitary peg to the US dollar to a basket peg, a 15-25 percent appreciation of the RMB, and wider margins around the new peg. Existing controls on China's capital outflows would be either maintained or liberalized only marginally, at least in the short run. Step two, to be implemented later when China's banking system is considerably stronger than it is today, would involve a transition to a "managed float," along with a significant liberalization of China's capital outflows.

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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP04-1.

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Date of creation: Jun 2004
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Handle: RePEc:iie:wpaper:wp04-1
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  1. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
  2. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
  3. Schnabl, Gunther, 2003. "China: a stabilizing or deflationary influence in East Asia?The problem of conflicted virtue," Tübinger Diskussionsbeiträge 263, University of Tübingen, School of Business and Economics.
  4. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  5. Funke, Michael & Ruhwedel, Ralf, 2001. "Export variety and export performance: empirical evidence from East Asia," Journal of Asian Economics, Elsevier, vol. 12(4), pages 493-505.
  6. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346, March.
  7. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
  8. Morris Goldstein & Philip Turner, 2004. "Controlling Currency Mismatches in Emerging Markets," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 373, March.
  9. Morris Goldstein, 1998. "The Asian Financial Crisis," Policy Briefs PB98-1, Peterson Institute for International Economics.
  10. Eswar Prasad, 2004. "China's Growth and Integration into the World Economy; Prospects and Challenges," IMF Occasional Papers 232, International Monetary Fund.
  11. Hinkle, Lawrence E. & Monteil, Peter J. (ed.), 1999. "Exchange Rate Misalignment: Concepts and Measurement for Developing Countries," OUP Catalogue, Oxford University Press, number 9780195211269, March.
  12. S.M. Shafaeddin, 2002. "The Impact Of China´S Accession To Wto On The Exports Of Developing Countries," UNCTAD Discussion Papers 160, United Nations Conference on Trade and Development.
  13. Michael Gavin & Ricardo Hausmann, 1996. "The Roots of Banking Crises: The Macroeconomic Context," IDB Publications (Working Papers) 5819, Inter-American Development Bank.
  14. Tao Ran & Ray Brooks, 2003. "China's Labor Market Performance and Challenges," IMF Working Papers 03/210, International Monetary Fund.
  15. Muscatelli, Vito Antonio & Stevenson, Andrew A & Montagna, Catia, 1995. "Modeling Aggregate Manufactured Exports for Some Asian Newly Industrialized Economies," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 147-55, February.
  16. Turner, Philip, 1988. "Savings and investment, exchange rates, and international imbalances: A comparison of the United States, Japan, and Germany," Journal of the Japanese and International Economies, Elsevier, vol. 2(3), pages 259-285, September.
  17. Barry J. Eichengreen & Inci Ötker & A. Javier Hamann & Esteban Jadresic & R. B. Johnston & Hugh Bredenkamp & Paul R. Masson, 1998. "Exit Strategies; Policy Options for Countries Seeking Exchange Rate Flexibility," IMF Occasional Papers 168, International Monetary Fund.
  18. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
  19. Marcus Noland, 1996. "US-China Economic Relations," Working Paper Series WP96-6, Peterson Institute for International Economics.
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