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The Renminbi fs Dollar Peg at the Crossroads

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  • Maurice Obstfeld

    (University of California, Berkeley (E-mail: obstfeld@econ.berkeley.edu))

Abstract

In the face of huge balance of payments surpluses and internal inflationary pressures, China has been in a classic conflict between internal and external balance under its dollar currency peg. Over the longer term, China fs large, modernizing, and diverse economy will need exchange rate flexibility and, eventually, convertibility with open capital markets. A feasible and attractive exit strategy from the essentially fixed RMB exchange rate would be a two-stage approach, consistent with the steps already taken since July 2005, but going beyond them. First, establish a limited trading band for the RMB relative to a basket of major trading partner currencies. Set the band so that it allows some initial revaluation of the RMB against the dollar, manage the basket rate within the band if necessary, and widen the band over time as domestic foreign exchange markets develop. The ultimate goal is a floating exchange rate coupled with some relative of inflation targeting. Second, put on hold ad hoc measures of financial account liberalization. They will be less helpful for relieving exchange rate pressures once the yuan/basket rate is allowed to move flexibly within a band, and they are best postponed until domestic foreign exchange markets develop further, the exchange rate is fully flexible, and the domestic financial system has been strengthened and placed fully on a market-oriented basis.

Suggested Citation

  • Maurice Obstfeld, 2007. "The Renminbi fs Dollar Peg at the Crossroads," IMES Discussion Paper Series 07-E-11, Institute for Monetary and Economic Studies, Bank of Japan.
  • Handle: RePEc:ime:imedps:07-e-11
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    File URL: http://www.imes.boj.or.jp/research/papers/english/07-E-11.pdf
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    References listed on IDEAS

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    Cited by:

    1. Tian, Lei & Chen, Langnan, 2013. "A reinvestigation of the new RMB exchange rate regime," China Economic Review, Elsevier, vol. 24(C), pages 16-25.
    2. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco.
    3. XU, Yingfeng, 2009. "Relevant international experience of real exchange rate adjustment for China," China Economic Review, Elsevier, vol. 20(3), pages 440-451, September.
    4. Barry Eichengreen, 2008. "Should there be a coordinated response to the problem of global imbalances? Can there be one?," Working Papers 69, United Nations, Department of Economics and Social Affairs.
    5. Kyung-Soo Kim, 2006. "An Optimal Commitment Model of Exchange Rate Stabilization," Korean Economic Review, Korean Economic Association, pages 249-265.
    6. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.

    More about this item

    Keywords

    Renminbi; China Currency; China Balance of Payments; Fixed Exchange Rate Exit Strategy;

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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