Exchange Rate Regime Transition And Choice In Financial Development

Exchange rate regime choice is an unavoidable significant project, and the arrangement of exchange rate regime is of great importance to one country's economic development and financial stability. However, in recent years, financial crises and exchange rate regime collapse happened frequently, for example, 1992-1993 ERM crisis, 1994-1995 Mexico Peso crisis, 1997-1998 Southeast Asia currency crisis and the following Brazil, Russia, Turkey exchange rate regime collapse as well. All of these revealed the fact that many countries face dilemma in exchange rate regime arrangement. So, choosing exchange rate regime transition as this dissertation's topic is of great theory and reality sense.The viewpoint of this dissertation is that, whether exchange rate arrangement is effective is related to the level of one country's financial development. The exchange rate regime that is ineffective in financial liberalization countries maybe effective in the special institution environment of financial constraint countries. But the already literature generally treated the level of financial development as a given precondition, not a variable, and the path research of exchange rate regime transition in the process of financial development has been paid little attention to. So, it is necessary to reinterpret the transition and choice of exchange rate regime in a new analytical framework, so as to settle this shortcoming of already research. Based on the endogenous relationship between level of financial development and exchange rate regime, this dissertation put forward the leap path of exchange rate regime transition in the first. Then, through the analysis on optimal exchange rate regime in different financial development stage, this article demonstrated the leap path from theoretical and empirical perspectives. At last, the author applied the path to China, and supposed suggestions for RMB exchange rate regime reform.The detailed contents and the main points of the thesis are as follows:Chapter 1, Introduction. This chapter discussed the research meaning, analytical framework, research method, and the new ideas.Chapter 2, Exchange rate regime transition in the process of financial development. Through the exertion of new institution economics and financial development level as the main explanatory variable, this chapter gave the view that exchange rate regime transition has its own endogenous path, and government's policy design should abide by the rule. This endogenous path is leaping, which is that, in the stage of financial constraint, monetary authorities should maintain moderate exchange market government, and only enlarge the elasticity of exchange rate in the frame of pegged regime; in the stage of financial liberalization, exchange market governance should be released, and cause the pegged regime leap to float regime. That is, the leap of exchange rate regime is the result of accumulation of financial reforms.Chapter 3, Exchange rate choice in financial constraint. In the framework of "Institution-Conduct-Performance", this part demonstrated the endogenous path in financial constraint stage from theoretical perspective. The first two sections pointed the risk of bipolar regimes in this special stage, so pegged choice maybe is the appropriate choice. In the usage of reputation mechanism, the third section concluded that, signaling makes the zero inflation policy credible in the situation of asymmetric information; as a result, the pegged choice is maintainable. Then, here analyzed the optimal behavior of economic agents in pegged regime by cost-benefit analysis. Concerning to the different performances of different regime choices, the last section discussed the performance of pegged regime during the process of financial development.Chapter 4, Exchange rate choice in financial liberalization. Also in the framework of "Institution-Conduct-Performance", this part demonstrated the endogenous path in financial liberalization stage from theoretical perspective. In this stage, the risk of pegged regime is enhanced, and the regime environment has changed, so the ability of shocks absorber becomes the primary determinative factor in choosing exchange rate regime. Thus, float regime maybe is the right choice. Then, here constructed economic shock model to demonstrate that, in most situations, float regime behaves better than pegged regime, which showed the former is the optimal choice in this senior stage of financial development. This part also analyzed the optimal behavior of economic agents from cost-benefit perspective. The last part gave the curve about float regime performance during the entire process of financial development.Chapter 5, Empirical analysis on the effect of financial development on exchange rate regime choice. This chapter demonstrated the endogenous path from empirical perspective. Analysis on countries' exchange rate regime practice showed that, once the pegged collapsed, countries in financial constraint chose to peg once more, and the fact is the best proof for the optimum of pegged regime. What's more, the practice of countries in financial liberalization is the best proof for the optimum of float regime. Next, this chapter deeper analyzed the effect of financial development on exchange rate regime using econometric model. The result also showed the positive relationship between financial development and exchange rate regime elasticity.Chapter 6, Appliance of endogenous path of exchange rate regime transition: The trend for RMB exchange rate regime. This chapter concluded above theoretical and empirical research, and applied the conclusions to China. Policy suggestions given are that, resuming present regime of pegging currency basket, but with the deeper of financial development, the elasticity of RMB should be larger. Till the conditions of financial liberalization are mature, make the pegged regime leap to float regime.The new ideas of the dissertation are as follows:(1) Research exchange rate regime transition and choice systematically and deeply from theoretical, empirical and policy aspects respectively. On the background of financial development, this thesis put up the leap path, and through the analysis on optimal exchange rate regime in different stage of financial development, demonstrated the path theoretically and empirically, plus the suggestions on the following path of RMB, constructing the main innovation of this dissertation.(2) Summarize the possible path of exchange rate regime transition using new institution economics, and distinguish the form of exchange rate regime transition from various perspectives, and attempt to give their definitions.(3) Analyze the optimal behavior of economic agents using cost-benefit method. Construct their respective utility functions, on the condition whether the monetary policy is independent, solving the equilibrium condition by the use of Lagrange function.(4) Discuss the economic performance of pegged regime and float regime, and on the basis of this discussion, give the performance curve of different regimes. By comparison, in financial constraint stage, pegged choice is better than float choice; on the contrary, in financial liberalization stage, float choice is better than pegged choice.(5) By constructing economic shock model, stability of output and price as the welfare standard, this thesis researched the different effects of different regimes when suffering monetary and real shocks. The result shows that, in most situations, pegged choice brings bigger output and price fluctuation, so float regime is the optimal choice in financial liberalization countries.(6) On the basis of LYS real exchange rate regime database, this thesis gave statistics analysis on the historical development, the sustaining term, the term between two pegged, and so on. The results denied the "bipolar" theory, and pointed out that, though the sustaining term of most pegs is short, but once the peg failed, government usually turned to new peg in short term, and exhibited "path dependence" in policy making.(7) Construct econometric regression model, using cross section data of 145 countries, analyzing the effect of financial development on regime choice quantitatively, exchange rate regime as the explained variable, financial development level as the key explanatory variable. To improve the explanatory ability of the model, some main economic and political variables are also chosen as the co-explanatory variables.In summary, in different stage of financial development, there exists different need for exchange rate regime. Higher the financial development level, higher the exchange market freedom. This can be applied to explain, why on the same moment, different countries choose different regimes, and why the same country chooses different regimes in different periods. Maybe all of these can be subscribed in one sentence, "No single exchange rate regime is right for all countries or at all times."...