China’s New Exchange Rate Regime, Optimal Basket Currency and Currency Diversification

Zhang, Zhichao; Shi, Nan; Zhang, Xiaoli

doi:10.2139/ssrn.1914296

Cited by 6 publications

(3 citation statements)

References 42 publications

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“…The next question is what policy target the Chinese Government wants to achieve if a currency basket system is implemented. Zhang et al (2011) assumed that China's exchange rate policy goal was to ensure the stability of its balance of payments. Some studies consider one main part of the balance of payments, so stabilization of the trade balance is also considered as a measurement of optimal exchange rate policy (Ito et al, 1998;Ogawa and Ito, 2002;Shioji, 2006), but Shioji (2006) also points out that trade balance stabilization may not be the only concern for some central banks: they may focus on the shortrun fluctuations in GDP or the welfare (usually measured by consumption) of people.…”

Section: Introductionmentioning

confidence: 99%

Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate

Wang

Balli

2015

Pacific Economic Review

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We calculated the real effective exchange rate indexes and measured their volatilities based on four currency baskets to find which currency basket is optimal for achieving China's policy target of keeping exchange rates stable. The volatility of the bilateral exchange rate between the RMB and the US dollar is also calculated to make a comparative analysis. Results showed that the bilateral exchange rate of the RMB and the US dollar is only stable in special time periods. In most time periods, pegging to the G3 currency basket is optimal to achieve the goal of stabilizing exchange rates while pegging to the AMU currency basket will result in the most volatile exchange rates.

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Section: Introductionmentioning

confidence: 99%

Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate

Wang

Balli

2015

Pacific Economic Review

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“…6 Cheung et al (2007) evaluate whether the renminbi is misaligned, relying upon conventional statistical methods of inference, and suggest that the renminbi is undervalued, but not by a statistically significant margin. 7 Zhang et al (2011) find that as the monetary authority is aiming to minimize the volatility of the external account, it is advisable and viable for China to form a basket currency with a diversified portfolio of currencies. The rest of the paper is organized as follows.…”

Section: Introductionmentioning

confidence: 99%

Dynamic Transition of Exchange Rate Regime in China

Yoshino

Kaji

Asonuma

2014

China and World Economy

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The paper considers the optimal transition path for China's exchange rate regime. How can China successfully make the shift from the current dollar peg regime to a more desirable regime, whether a basket peg or a floating regime? To answer this question, we develop a dynamic small open economy general equilibrium model. We construct four transition policies based on a basket peg or a floating regime and compare the welfare gains of these policies relative to maintaining the dollar peg regime. Two main results are derived from the quantitative analysis using Chinese data from 1999Q1 to 2010Q4. First, following a gradual adjustment to a basket peg regime is the most appropriate path for China to take, with minimal welfare losses associated with the shift in the exchange rate regime. Second, a sudden shift to the basket peg is the second best solution, and is superior to a sudden shift to floating because the monetary authority can efficiently determine optimal weights to attach to currencies in the basket to achieve policy goals once they adopt a basket peg regime. Eichengreen (2006), have pointed out the shortcomings of the de facto peg to the dollar and advocate the benefits of greater flexibility in the exchange rate under a floating regime to help the Chinese monetary authority tailor monetary conditions to domestic needs. In this context, the immediate removal of capital restrictions and gradual widening of the band of the exchange rate have been proposed.Others, such as Ito et al. (1998), Kawai (2004) and Yoshino et al. (2004a, b) propose a transition to a basket peg regime, which would overcome drawbacks of the dollar peg regime, with the economy currently negatively influenced by fluctuations in exogenous exchange rates: for instance, the dollar-yen rate. 1,2 For a country like China, which has close economic relationships with multiple partners, including the European Union, Japan and the USA, exchange rate stabilization using a basket comprising these currencies would be beneficial because it would remove the problem of large fluctuations in exchange rates. 3Contrary to the two lines of thought outlined above, McKinnon and Schnabl (2014) emphasize the importance of stabilizing the renminbi-US dollar exchange rate for the country's international competitiveness.Regardless of whether a basket peg or floating regime is considered to be appropriate in the long term, there remains a major question that has not been addressed in the literature on exchange rate regimes. How can China successfully transition to a desirable regime, whether a basket peg or a floating regime, from the current de facto peg to the dollar regime? Needless to say, a departure from the status quo would entail substantial costs for the monetary authority. Along the transition path toward a basket peg or a floating regime under perfect capital mobility, the monetary authority would have to remove capital controls and switch policy instruments (basket weight or money supply). To derive the optimal transition policy for China, we develop a ...

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“…Xu (2011) extends the general equilibrium framework further by introducing vertical trade, and applies her model to discuss the choice of exchange rate regime for small open economies. Most related to the focus of our paper is Zhang et al (2011), which analyses an optimal currency basket of RMB and considers its impact on the Chinese economy.…”

Section: Introductionmentioning

confidence: 99%

An Optimal Currency Basket to Minimize Output and Inflation Volatility: Theory and an Application to Hong Kong

Cheng

2014

Pacific Economic Review

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In this paper we develop a theoretical model of an optimal currency basket for a small open economy. A currency basket for the home economy is defined as a chosen weighted average of a subset of foreign currencies, and an optimal currency basket is taken to be one that minimizes a given weighted average of the expected output volatility and expected inflation volatility. This theoretical model is then applied to Hong Kong, which has adopted a currency board system for close to 30 years. We estimate an optimal currency basket for Hong Kong and compare its performance with the existing currency board system as well as with currency baskets whose weights are given by export and import trade shares.

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China’s New Exchange Rate Regime, Optimal Basket Currency and Currency Diversification

Cited by 6 publications

References 42 publications

Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate

Possible Best Currency Basket Selection from the Perspective of Real Effective Exchange Rate

Dynamic Transition of Exchange Rate Regime in China

An Optimal Currency Basket to Minimize Output and Inflation Volatility: Theory and an Application to Hong Kong

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