China's Exchange Rate Debate

Laurenceson, James and Qin, Fengming (2005) China's Exchange Rate Debate. Discussion Paper, No. 1, East Asia Economic Research Group, School of Economics, The University of Queensland.

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Author Laurenceson, James
Qin, Fengming
Title China's Exchange Rate Debate
School, Department or Centre East Asia Economic Research Group, School of Economics
Institution The University of Queensland
Report Number Discussion Paper, No. 1
Publication date 2005-08-01
Subject 340203 Finance Economics
Abstract/Summary This paper reviews and critically comments on the policy debate surrounding China's exchange rate regime. There are presently two key issues - firstly, whether the RMB has become significantly undervalued, and secondly, whether China would benefit from adopting a flexible exchange rate regime. We find little rigorous evidence in support of the first proposition. With respect to the second, the consensus view is that a flexible exchange rate is desirable as it would support macroeconomic stability by providing greater monetary independence. Most absent in this position is convincing evidence that exchange rate stability is associated with macroeconomic instability, either in the context of China or broader international experience. The consensus position also appears to understate many of the benefits that accrue to China as a result of having a stable exchange rate, as well as many of the costs associated with moving to greater flexibility. We conclude that while adopting a flexible exchange rate regime may pass the cost/benefit test sometime in the future, for now the focus ought to firmly be on domestic financial reform.
Keyword China
exchange rates
stability

Document type: Department Technical Report
Collection: Discussion Papers (School of Economics)
 
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Created: Thu, 13 Oct 2005, 10:00:00 EST by Belinda Weaver (EA)