Welfare Analysis Of Exchange Rate Regime

The exchange rate regime of a country plays an important part in its long-term economic development, balancing its domestic and foreign trade. However,"no single currency regime is right for all countries or at all times, which is only a means to enhance the social economic welfare."After the southeastern financial crisis, Eichengreen concluded that"all kinds of problems in Asia come down to the exchange rate regime". In real life, the RMB exchange rate and its regime are getting more and more attention as a"public goods"in international trades with the rapid development of China's economy. In light of this knowledge, this thesis conducts an analysis of welfare in the exchange rate regime as the theme of research and seeks for a type of transparent exchange rate regime welfare theoretically. This kind of"welfare analysis of exchange rate regime"means a theory of assessment and choice of the exchange rate system in the perspective of welfare.Chapter two states the relevant theories, analyzing the theoretical basis of the exchange rate regime welfare in terms of the choice theory of exchange rate system, the new open economy macroeconomics and applied welfare economics. The thesis proposes that, in terms of theoretical basis, the cost-benefit theory, economic performance determinism and economic impact determinism chosen by the exchange rate system all bear some welfare thought of exchange rate system. In terms of methodological basis, a strict analysis of welfare in the exchange rate regime is conducted on the basis of an intertemporal approach of the new open economy macroeconomics, thus the research framework of which constitutes the fundamental research paradigm of the welfare analysis of exchange rate regime. On the basis of the aforementioned theories, this thesis begins with the analysis of the categories of exchange rate regime, and then discusses the welfare comparison of exchange rate regime, the meaning of welfare under the fluctuating exchange rate, the welfare effect of exchange rate pass-through and the welfare assessment of reform of the exchange rate regime.In the comparison between welfare of exchange rate regime in chapter three, the paper develops exposition according to the thread of thought of "one mainline, two visual angles". One mainline is that nominal price stickiness whether exists in economic environment. The two visual angles are the welfare analysis visual angles based on consumer utility maximization and government loss minimization. The study of welfare comparison model of exchange rate regime can be divided in two phases in accordance with the economic environment considered whether exists nominal price stickiness: the first is welfare analysis of exchange rate regime under traditionally open economy macroeconomics visual angle without considering the nominal price stickiness in any kind; the second is welfare analysis of exchange rate regime under new open economy macroeconomics visual angle. In the welfare analysis model of exchange rate regime, the welfare comparison based on consumer utility maximization is the basic visual angle of welfare analysis of exchange rate regime. When developing welfare comparison, not only the influence of consumption variance on welfare is considered, but also the effect of average level (mean) of consumer is analyzed. The paper will make the welfare comparison of PCP, PTM under the floating exchange rate system and FER established by Michael B. Devereux and Charles Engel as benchmark model. The basic conclusion of this model is that the exchange rate system evidently depends on price behavior. When the price is fixed as the currency of the consumer's country, the internal consumption variance under the floating exchange rate system is free of the influence of foreign currency variance. However, if the price is fixed as the currency of the producer's country or fixed exchange rate, there exists transfer of external perturbation. One of important feature of model is that the exchange rate regime influences not only the variance of consumption and output but also its average level.When the price is to be determined in light of the currency of the country where producers are located, the fixed exchange rate and floating exchange rate systems are counteracting with each other. The adjustments of exchange rate under the floating exchange rate regime lead to a relatively small consumption variance, but the floating of exchange rate itself will lead to a relatively low consumption level. When the price is to be determined in light of the currency of the country where consumers are living, the floating exchange rate regime always takes the advantageous place. On the basis of this model, this paper examines the problems of welfare of the exchange rate regime from various aspects by taking into consideration the effects from internationalized production, not totally free flow of capital, addition of capital elements into production functions, balance-sheet effect, an incomplete market, endogenous price elasticity and other elements that make the model more realistic.On the basis of a theoretical analysis of the meaning of welfare under the fluctuating exchange rate and the mechanism of welfare effect influenced by exchange rate pass-through, chapter four and chapter five conduct a simulated analysis of the path of exchange rate pass-through and welfare effect under economic impact from the RMB exchange rate by means of path analysis. Empirical research has found that RMB exchange rate, by responding to the economic impact, has turned to the producers and consumers and thus brought considerable welfare impact on them, and meanwhile, it has found that the RMB exchange rate has slightly greater impact on demand than on supply. The policy meaning from these findings is that maintaining a continuing and stable growth of domestic demand and keeping the price at a moderate level are important guarantees to reduce the welfare losses by the floating of exchange rate through price transfer mechanism.Finally, Chapter Six makes a historical judgment based on the welfare evaluation of the RMB exchange rate system transformation since the Opening-up and the Reform. It is found that the double-track system of RMB exchange rate may bring minor welfare interests, but the fixed exchange rate system of RMB related to dollars has resulted in the long-term maladjustment of the actual exchange rate, which has to some extent reduced the welfare level of consumers.The possible innovative points of this thesis are as follows.The first is the innovative research angle. The exchange rate regime is an important subject in the international financial theories and the open economic practices. Traditionally, the studies on the exchange rate regimes both at home and abroad seldom involve the welfare analysis of the exchange rate regime. Compared with other angles to study the exchange rate system, the"Welfare Theory"directly touches the people's welfare, which is the ultimate goal of the economic system and the economic development. Therefore, we consider that the analysis of the exchange rate regime from the angle of welfare should be paid much attention to.The second is a try on the construction of the theoretical frame. This thesis mainly tries to systematically summarize in theory the welfare analysis of the exchange rate regime. It proposes three theoretical foundations of the construction of the exchange rate regime, analyzes the two research angles of the welfare analysis of the exchange rate regime, and outlines the structure of the welfare analysis of the exchange rate regime. In respect of the theoretical framework, this thesis makes welfare analysis under the welfare category of the exchange rate system, and forms a relatively complete research system, including the welfare comparison of the exchange rate regimes, the welfare meaning of the exchange rate floatation, the welfare effect made by the exchange rate and the welfare evaluation of the exchange rate transformation.â…¢The innovation of positive method. In the aspect of positive study we try to use the route analysis to carry out the model analysis of the mechanism of price pass-through and welfare effect which the RMB exchange rate responds to economic shock and have gained the corresponding policy implications. And its application of methods is of the spirit of innovation to some extent. In addition, based on the principle of historical criticism we carry out the welfare evaluation selectively on reformation of the RMB exchange rate regime since the opening up to the outside world. The conclusion is not surely well-founded or even maybe fallacious, but it has embodied the spirit of venturing on exploration. In our opinion, more attention should be paid to the welfare evaluation on system reformation in the process of implementation of human-oriented the scientific development view.â…£The innovation of numerical finishing. We face challenges in the selection and finishing of data when analyzing the welfare effect of dual-track system in RMB exchange rate. Therefore we obtain the monthly data from the quarterly data by using the spline interpolation method, which, to some extent, has solved the problem that the data for positive study is minorIt must be pointed out that the welfare analysis of the exchange rate is a forward subject. There is no uniform theoretical framework at present and so it is very hard to get a consistent conclusion in the aspect of positive study. Therefore, the theoretical resolution and the establishment of framework in this paper is just a try, in which the deficiency, especially the permeability of theory is self-evident. The strict quantitative analysis is short in the welfare evaluation of the reformation of RMB exchange rate regime in the aspect of positive study. How to make use of the advanced methods developed in recent years such as the grid-search method to carry out the quantitative assessment on the welfare of the RMB exchange rate system is the subject to be solved for further perfection in the next step.