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Assessing China'S Renminbi Peg To The U.S. Dollar: The Case For Greater Rmb Exchange Rate Flexibility

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  • WEI SUN

    (Department of Economics, Seidman College of Business, Grand Valley State University, 401 West Fulton Street, Grand Rapids, MI 49504, USA)

  • LIAN AN

    (Department of Economics and Geography, Coggin College of Business, University of North Florida, FL, USA)

Abstract

This paper assesses China's Renminbi peg to the U.S. dollar using a structural VAR model. One unique contribution of the paper is that we model China as a large open economy in one structural VAR model with the U.S. by utilizing combinations of short- and long-run identification restrictions and relax the small open economy assumption usually imposed on China. Using monthly data for the period of 1990:4 to 2007:12, we find the following. First, U.S. shocks do not explain much of the output fluctuations in China, indicating that the two economies are subject to asymmetric shocks. Optimum currency area theory suggests that more flexibility of the RMB relative to the dollar may be desirable. Second, U.S. shocks explain little of the fluctuations in China's CPI, suggesting that the benefits of importing inflation from the U.S. by pegging to the dollar are minimal, thus more flexibility in the RMB relative to the dollar is feasible. Third, U.S. shocks do not influence China's international competitiveness (REER) to a noticeable extent, suggesting that moving toward more flexibility relative to the dollar may be in China's interest.

Suggested Citation

  • Wei Sun & Lian An, 2012. "Assessing China'S Renminbi Peg To The U.S. Dollar: The Case For Greater Rmb Exchange Rate Flexibility," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 57(01), pages 1-18.
    • Handle: RePEc:wsi:serxxx:v:57:y:2012:i:01:n:s0217590812500038
    DOI: 10.1142/S0217590812500038
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    References listed on IDEAS

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    1. Fabio Canova & Joaquim Pires Pina, 1998. "Monetary policy misspecification in VAR models," Economics Working Papers 420, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999.
    2. Clarida, Richard & Gali, Jordi, 1994. "Sources of real exchange-rate fluctuations: How important are nominal shocks?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 1-56, December.
    3. Mardi Dungey & Denise Osborn, 2009. "Modelling International Linkages for Large Open Economies: US and Euro Area," CAMA Working Papers 2009-24, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    4. Gerlach, Stefan & Smets, Frank, 1995. "The Monetary Transmission Mechanism: Evidence from the G-7 Countries," CEPR Discussion Papers 1219, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Osborn, Denise R. & Vehbi, Tugrul, 2015. "Growth in China and the US: Effects on a small commodity exporter economy," Economic Modelling, Elsevier, vol. 45(C), pages 268-277.

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    More about this item

    Keywords

    China; exchange rate flexibility; U.S; structural VAR; C32; F31; F41; O53;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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