Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/101216
Authors: 
Yoshino, Naoyuki
Kaji, Sahoko
Asonuma, Tamon
Year of Publication: 
2014
Series/Report no.: 
ADBI Working Paper Series 476
Abstract: 
This paper analyzes the optimal transition of the exchange rate regime in the People's Republic of China (PRC). How the PRC can successfully reach the desired regime - whether a basket peg or floating regime - from the current dollar-peg regime remains a major question. To answer it, we develop a dynamic small open-economy general equilibrium model. We construct four transition policies toward the basket-peg or floating regime and compare the welfare gains of these policies to those of maintaining the dollar-peg regime. Quantitative analysis using PRC data from Q1 1999 to Q4 2010 leads to two conclusions. First, a gradual adjustment toward a basket-peg regime seems the most appropriate option for the PRC, and would minimize the welfare losses associated with a shift in the exchange rate regime. Second, a sudden shift to a basket peg is the second-best solution. This is preferable to a sudden shift to a floating regime, since it would enable the authorities to implement optimal weights efficiently in order to achieve policy goals once a decision has been made to adopt a basket-peg regime.
Subjects: 
exchange rate regime
exchange rate adjustment
Chinese exchange rate regime
dynamic adjustment
transition path
JEL: 
E42
F33
F41
F42
Document Type: 
Working Paper

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