Working Paper: CEPR ID: DP4375
Authors: Barry Eichengreen
Abstract: This Paper reviews the controversy over China?s exchange rate regime. Placing the issue in the context of the literature on exit strategies, it argues that now is the best time for China to exit from its peg. Moving to a managed float would be in the country?s own interest; it would help the Chinese authorities to gain better control of domestic money and credit conditions. The Paper argues that the principal objections to this recommendation ? that the country?s banking system is weak, many of its state enterprises are bankrupt, and its capital account is not yet sufficiently open ? are unconvincing. Finally it assesses the likely impact on other Asian countries, concluding contrary to the conventional wisdom that these are likely to be minor at best.
Keywords: Asia; China; Exchange Rate; Monetary Policy
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| current peg to the U.S. dollar (F31) | inefficiencies in managing inflation and growth (E31) |
| current peg to the U.S. dollar (F31) | overheating in the economy (E32) |
| current peg to the U.S. dollar (F31) | inflationary pressures (E31) |
| shift to a managed float (F31) | better control over domestic money supply and credit conditions (E58) |
| transition to a more flexible exchange rate (F31) | minor impacts on other Asian economies (F69) |
| current undervaluation of the renminbi (RMB) (F31) | modest appreciation (5-10%) would suffice to address domestic imbalances (F31) |