Dynamic Analysis of the Exchange Rate Regime: Policy Implications for Emerging Countries in East Asia

This paper discusses exchange rate policies in East Asia. In particular, we explore whether actual policies that have been implemented by East Asian countries after the Asian Financial Crisis follow or deviate from theoretically “desirable” policies over the medium and long terms. On theoretical analysis, we show the relative superiority of a basket‐peg regime with the basket weight rule when compared with a floating regime implementing the interest rate rule or money supply rule. For countries that currently adopt a fixed exchange rate regime, they would be better off shifting toward either a basket‐peg or a floating regime over the medium term. A shift to a basket peg is more preferred when compared with a shift to a floating regime when the exchange rate fluctuations are large.     

Dynamic Transition of Exchange Rate Regime in China

Thepaper 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.