Abstract
The chapter addresses the question: what precisely is the exchange rate regime that China has put into place since it announced a move away from the dollar peg in 2005? 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 technique estimates implicit de facto currency weights when the hypothesis is a basket peg with little flexibility. The second technique is 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. 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.
This is a preview of subscription content, log in via an institution.
Buying options
Tax calculation will be finalised at checkout
Purchases are for personal use only
Learn about institutional subscriptionsNotes
- 1.
Frankel and Wei (2007) found no significant role for these currencies, during most of the subsequent two years, with the partial exception of the ringgit.
- 2.
Frankel (1993) used purchasing power over a consumer basket of domestic goods as numeraire; Frankel and Wei (1995) used the SDR; Frankel and Wei (1994, 2006), Ohno (1999), and Eichengreen (2006) used the Swiss franc; Bénassy-Quéré (1999), the dollar; Frankel et al. (2000), a GDP-weighted basket of five major currencies; and Yamazaki (2006), the Canadian dollar. Bénassy-Quéré et al. (2004) propose a modification of the methodology, with a method of moments approach; the claim is that the results then do not depend on the choice of a numeraire currency.
- 3.
If the linear equation holds precisely in terms of any one “correct” numeraire, then add the log exchange rate between that numeraire and any arbitrary unit to see that the equation also holds precisely in terms of the arbitrary numeraire. This assumes the weights add to 1, and there is no error term, constant term, or other non-currency variable.
- 4.
Among the extensions and robustness checks in that paper was a check whether the results were sensitive to the numeraire, as between the SDR and gold.
- 5.
The choice of which currency to drop from the right-hand side in order to impose the adding up constraint, in this case the won, is completely immaterial to the estimates. The choice of which currency to use as numeraire, by contrast, is material to the estimates (to the extent that the true regime differs substantially from a perfect basket peg).
- 6.
Excluding June 2005, the month of the discrete revaluations.
- 7.
One can see from graphs in Frankel and Wei (2008) how commodity producers tend to have higher variability in exchange market pressure, regardless whether they are peggers, floaters, or in between.
- 8.
The progenitor of the Exchange Market Pressure variable, in a rather different context, was Girton and Roper (1977).
- 9.
Clearly many of the authors of these papers are fully aware of the issue.
- 10.
Frankel and Wei (2008).
- 11.
For comparison, the coefficient exchange market pressure in the case of the Australian and Canadian dollars – two floaters – only ever gets as high as 0.3 or 0.4 – Frankel and Wei (2008). In theory, if changes in reserves precisely captured foreign exchange intervention and nothing else, the estimated δ should approach 1.0 in the case of pure floaters. In practice, reserves often change for reasons other than intervention.
References
Bénassy-Quéré, Agnès, 1999, “Exchange Rate Regimes and Policies: An Empirical Analysis,” in Exchange Rate Policies in Emerging Asian Countries, edited by Stefan Collignon, Jean Pisani-Ferry, and Yung Chul Park, Routledge, London, pp. 40–64.
Bénassy-Quéré, Agnès, Benoit Coeuré, and Valérie Mignon, 2004, “On the Identification of de facto Currency Pegs,” Journal of Japanese and International Economies 20(1), 112–127, March.
Calvo, Guillermo and Carmen Reinhart, 2002, “Fear of Floating,” Quarterly Journal of Economics 117(2), 379–408.
Eichengreen, Barry, 2006, “China's Exchange Rate Regime: The Long and Short of It,” revision of paper for Columbia University's conference on Chinese money and finance held in New York on February 2–3.
Frankel, Jeffrey, 1993, “Is Japan Creating a Yen Bloc in East Asia and the Pacific?” in Regionalism and Rivalry: Japan and the US in Pacific Asia, edited by Jeffrey Frankel and Miles Kahler, University of Chicago Press, Chicago, pp. 53–85.
Frankel, Jeffrey, 2006, “On the Yuan: The Choice Between Adjustment Under a Fixed Exchange Rate and Adjustment under a Flexible Rate,” in Understanding the Chinese Economy, edited by Gerhard Illing, CESifo Economic Studies, Munich.
Frankel, Jeffrey, 2009, “New Estimation of China’s Exchange Rate Regime,” in Pacific Economic Review, special issue, “China's Impact on the Global Economy,” edited by Menzie Chinn, Wiley.
Frankel, Jeffrey, Sergio Schmukler and Luis Servén, 2000, “Verifiability and the Vanishing Intermediate Exchange Rate Regime,” in Brookings Trade Forum 2000, edited by Susan Collins and Dani Rodrik, Brookings Institution, Washington DC.
Frankel, Jeffrey and Shang-Jin Wei, 1994, “Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies,” in Macroeconomic Linkages: Savings, Exchange Rates and Capital Flows, edited by Takatoshi Ito and Anne Krueger, University of Chicago Press, Chicago, pp. 295–329.
Frankel, Jeffrey and Shang-Jin Wei, 1995, “Emerging Currency Blocs,” in The International Monetary System: Its Institutions and its Future, edited by Hans Genberg, Springer, Berlin, pp. 111–143.
Frankel, Jeffrey and Shang-Jin Wei, 2006, “Currency Mysteries,” May 28.
Frankel, Jeffrey and Shang-Jin Wei, 2007, “Assessing China’s Exchange Rate Regime,” Economic Policy 51, 575–614, July.
Frankel, Jeffrey and Shang-Jin Wei, 2008,“Estimation of De Facto Exchange Rate Regimes: Synthesis of The Techniques for Inferring Flexibility and Basket Weights,” IMF Staff Papers, 55, 384–416.
Girton, Lance and Don Roper, 1977, “A Monetary Model of Exchange Market Pressure Applied to the Postwar Canadian Experience,” American Economic Review 67(4), 537–548, September.
Jen, Stephen, 2005, “Chinese RMB Basket Still a Mystery,” Global Economics Forum, Morgan Stanley, August 19.
Levy-Yeyati, Eduardo and Federico Sturzenegger, 2003, “To Float or to Trail: Evidence on the Impact of Exchange Rate Regimes on Growth,” American Economic Review, 93(4), 1173–1193, September.
Levy-Yeyati, Eduardo and Federico Sturzenegger, 2005, “Classifying Exchange Rate Regimes: Deeds vs. Words,” European Economic Review, 49(6), 1603–1635, August.
Ogawa, Eiji, 2006, “The Chinese Yuan after the Chinese Exchange Rate System Reform”, China & World Economy, 14(6), 39–57, November–December.
Ohno, Kenichi, 1999, “Exchange Rate Management in Developing Asia,” Working Paper No. 1, January, Asian Development Bank Institute.
Shah, Ajay, Achim Zeileis, and Ila Patnaik, 2005, “What is the New Chinese Currency Regime?” Unpublished, November.
Yamazaki, Kazuo, 2006, “Inside the Currency Basket,” Columbia University and Mitsubishi UFJ Trust and Banking Corp., December.
Zhou, Xiaochuan, 2005, “Governor’s Speech at the Opening of the Shanghai Headquarters of the People’s Bank of China (in Chinese),” www.hexun.com, August 10. Speech (in English) on PBoC website: http://www.pbc.gov.cn/english//detail.asp?col=6500&ID=82
Acknowledgment
The author would like to thank Danxia Xie for excellent research assistance and the Mossavar-Rahmani Center for Business and Government for support. Part of this chapter draws on “New Estimation of China’s Exchange Rate Regime,” Pacific Economic Review (Wiley), special issue, “China's Impact on the Global Economy,” edited by Menzie Chinn, 2009.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Appendix: Estimation of Weights with Daily Exchange Rate Data, but Without EMP Variable
Appendix: Estimation of Weights with Daily Exchange Rate Data, but Without EMP Variable
Rights and permissions
Copyright information
© 2009 Springer Science+Business Media, LLC
About this chapter
Cite this chapter
Frankel, J.A. (2009). New Estimation of the Renminbi Regime. In: Barth, J., Tatom, J., Yago, G. (eds) China’s Emerging Financial Markets. The Milken Institute Series on Financial Innovation and Economic Growth, vol 8. Springer, Boston, MA. https://doi.org/10.1007/978-0-387-93769-4_8
Download citation
DOI: https://doi.org/10.1007/978-0-387-93769-4_8
Published:
Publisher Name: Springer, Boston, MA
Print ISBN: 978-0-387-93768-7
Online ISBN: 978-0-387-93769-4
eBook Packages: Business and EconomicsEconomics and Finance (R0)