A B S T R A C TThe paper proposes a pendulum gravity model of outward FDI and export. Outward FDI and export can be complementary or substitute, depending on the development stages of outward FDI. The development of outward FDI is accompanied by advancements in productivity, technology and favorable transformations in factor endowment differences, which can be reflected in the ratio of export to outward FDI. At early stages of outward FDI undertakings, the ratio of export to outward FDI is greater or much greater than the world's average, outward FDI and export are conjectured to be complementary with our analytical framework. As outward FDI matures, the pendulum swings to the other side, i.e., the ratio of export to outward FDI becomes smaller than the world's average. Outward FDI and export turn into substitute then. Empirical results and findings from examining two panel data sets support our conjecture and the proposed model, which integrate the two seemingly opposing sets of literature.

We propose a triangular purchasing power parity (PPP) analytical framework, which is theoretically justified and empirically validated. The mechanisms and channels through which a seemingly mystery relationship emerges are deliberated and examined, which renders significant implications to international monetary economics, finance and business. The de facto peg of the RMB to the US dollar, together with trade activities and arrangements, causes a triangular PPP effect that the dollar euro exchange rate is not a function of the relative prices in the US and Euroland. Instead, it becomes a function of the relative prices in the People's Republic of China (PRC) and Euroland. The results are supportive of triangular PPP in a three‐economy world of the US, Euroland and PRC.

This paper reveals the inherent characteristics behind the statistical phenomena of exchange rate interactions and co‐movements, corroborated empirically by exploring a range of currencies with varied degrees of flexibility. It then studies purposely the historical evolution and development prospects of the RMB exchange rate regime. The RMB exchange rate behaviour and statistical patterns are contrasted with the freely floating currencies in this context. Taking up alternative policy positions, the expected developments in RMB characteristics are deliberated, projecting a trajectory for further RMB regime reforms. How the RMB would fulfil the significant role on the global currency market as signified by its position in the SDR basket is contemplated, beyond a conventional policy shift and under the paradigm that the global currency market tends to be tri‐polar.

We are delighted to see Dr Alan King's interest and curiosity in the subject of PPP and, in particular, this paper of ours. This is a Rejoinder to his Comment.