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The Model and Empirical Estimation of the Optimal Flexibility of RMB Exchange-Rate Regime: A Study Based on the Price-Stabilization

Author

Listed:
  • Xiaohui Liu

    (Chinese Finance Research Institute, Southwestern University of Finance and Economics,Chengdu 610074, China)

  • Conglai Fan

    (School of Economics, Nanjing University, Nanjing 210093, China)

Abstract

Under the Mundell-Fleming-Dornbusch (M-F-D) framework, the paper develops a stochastic model to study the optimal choice of RMB exchange rate regime based on two objectives, namely the exchange rate stabilization and price stabilization. The paper finds that different policy objectives will lead to different optimal choices of RMB exchange-rate regime. If the central bank aims to stabilize the price level, the optimal choice would be a certain type of intermediate regime, or the optimal choice would be a fixed one if it aims to stabilize the RMB exchange rate. Based on the model, the paper empirically estimates China's open economy parameters and uses them to estimate the optimal flexibility of RMB exchange rate regime. The paper points out that China should allow more exchange rate changes to absorb its foreign exchange market pressure in order to stabilize the general price level, which indicates that China should move toward a more flexible exchange rate regime.

Suggested Citation

  • Xiaohui Liu & Conglai Fan, 2010. "The Model and Empirical Estimation of the Optimal Flexibility of RMB Exchange-Rate Regime: A Study Based on the Price-Stabilization," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 5(2), pages 187-209, June.
    • Handle: RePEc:fec:journl:v:5:y:2010:i:2:p:187-209
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    File URL: http://journal.hep.com.cn/fec/EN/10.1007/s11459-010-0010-7
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    Citations

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    Cited by:

    1. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    2. Meixing Dai, 2013. "In search of an optimal strategy for yuan’s real revaluation," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(1), pages 29-46, February.
    3. Jakub Borowski & Adam Czerniak & Krystian Jaworski, 2014. "The quest for determinants of Chinese exchange rate policy," Bank i Kredyt, Narodowy Bank Polski, vol. 45(5), pages 407�432-4.

    More about this item

    Keywords

    exchange rate regime flexibility; price stabilization; exchange-rate stabilization; exchange market pressure;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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