New Estimation of China's Exchange Rate Regime / Jeffrey A. Frankel.

By:

Frankel, Jeffrey A

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w14700.Publication details: Cambridge, Mass. National Bureau of Economic Research 2009.Description: 1 online resource: illustrations (black and white)Subject(s):

F31 - Foreign Exchange

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Available additional physical forms:

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Abstract: The paper updates the answer to the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach to estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency. Since the RMB and many other currencies today purportedly follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing "exchange market pressure" to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the dollar's weight onto the euro. The implication is that the appreciation of the RMB against the dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket.

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Working Paper	Biblioteca Digital	Colección NBER	nber w14700 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w14698 The Term Structures of Equity and Interest Rates /	nber w14699 Measuring the Financial Sophistication of Households /	nber w1470 Developing Country Debt and the Market Value of Large Commercial Banks /	nber w14700 New Estimation of China's Exchange Rate Regime /	nber w14701 Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds /	nber w14702 Government Transfers and Political Support /	nber w14703 Disclosure by Politicians /	Next

February 2009.

The paper updates the answer to the question: what precisely is the exchange rate regime that China has put into place since 2005, when it announced a move away from the dollar peg? Is it a basket anchor with the possibility of cumulatable daily appreciations, as was announced at the time? We apply to this question a new approach to estimating countries' de facto exchange rate regimes, a synthesis of two techniques. One is a technique that has been used in the past to estimate implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second is a technique used to estimate the de facto degree of exchange rate flexibility when the hypothesis is an anchor to the dollar or some other single major currency. Since the RMB and many other currencies today purportedly follow variants of Band-Basket-Crawl, it is important to have available a technique that can cover both dimensions, inferring weights and inferring flexibility. The synthesis adds a variable representing "exchange market pressure" to the currency basket equation, whereby the degree of flexibility is estimated at the same time as the currency weights. This approach reveals that by mid-2007, the RMB basket had switched a substantial part of the dollar's weight onto the euro. The implication is that the appreciation of the RMB against the dollar during this period was due to the appreciation of the euro against the dollar, not to any upward trend in the RMB relative to its basket.