Assessing China's exchange rate regime
By: Jeffrey A. Frankel, Shang-Jin Wei.
Contributors: Wei, Shang-Jin.; National Bureau of Economic Research.
Series: NBER working paper series -- no. 13100.; Working paper series (National Bureau of Economic Research) -- working paper no. 13100.
Publisher: National Bureau of Economic Research
Published: 2007
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 79
Subjects: Foreign exchange rates -- Government policy -- United States -- Econometric models; Foreign exchange rates -- China -- 21st century -- Econometric models
Description: This paper examines two related issues: (a) the implicit methodology used by the U.S. Treasury in determining whether China and America's other trading partners manipulate their exchange rates, and (b) the nature of the Chinese exchange rate regime since July 2005. On the first issue, we investigate the roles of economic variables consistent with the IMF definition of manipulation - the partners' overall current account/GDP, its reserve changes, and the real overvaluation of its currency - but also some variables suggestive of American domestic political considerations -- the bilateral trade balance, US unemployment, and an election year dummy. The econometric results suggest that the Treasury verdicts are driven heavily by the US bilateral deficit, though other variables also turn out to be quite important. On the issue of China's de facto exchange rate regime, we apply the technique introduced by Frankel and Wei (1994) to estimate implicit basket weights, adding several refinements. Within 2005, the de facto regime remained a peg to the dollar. However, there was a modest but steady increase in flexibility subsequently. We test whether US pressure has promoted RMB flexibility. We also test whether the recent appreciation against the dollar is due to a trend appreciation against the reference basket or a declining weight on the dollar in the reference basket, and suggest that they have different policy implications.
Notes: "May 2007"

Includes bibliographical references (p. 34-37).

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