Studies On Efficiency Of China's Exchange Rate Regime

After the creation of RMB exchange rate against US dollar on 18th, January 1949, the function of exchange rate in adjusting economy's operation as price leverage and policy leverage has been raised step by step. Moreover, during the past decades, the efficiency status quo of China's exchange rate regime has affected the operation of economy importantly.This thesis is intended to investigate the dynamic efficiency of China's exchange rate regime with the emphasis on its historical characters and empirical analysis. This thesis is composed of seven chapters in core of analyzing efficiency of RMB's exchange rate regime.The first chapter is an introduction to and outline of the study. This chapter introduces the background and status quo of the issue, gives a scratch of the whole thesis involving the innovation and shortage.The second chapter gives a series of definition such as institution, exchange rate regime and provides a background description of the evolution of efficiency standard in different opinions as well as China's exchange rate regime. Then selects classification method for Chian's exchange rate regime and put forward the efficiency definition of China's regime.The third chapter gives the standard of efficiency appraising based on the theories of efficiency and efficiency theories of exchange rate regime in different opinions.The article selects exchange rate formation mechanism, macro-economic policy incentive compatibility, parato efficiency and stabilization function mechanism as the criterion to appraise the efficiency of China's exchange rate regime from the appoint of historical characters. The efficient RMB's exchange rate regime calls for flexible and reasonable exchange rate formation mechanism to reflect the information involved in price. It also calls for the exisistence of stabilization function mechanism and character of policy leverage. These standards are existed to be examined according to different aspects. They are contents of chapter three to chapter six. The third chapter is focused on formation mechanism of China's exchange rate regime after stating its history and character. The important reform of China's exchange rate regime in 1994 and 2005 are analyzed after the analytical object and research period have been defined. The market power is enhancing and is functioning in the decision of RMB's exchange rate. However, some rigid restriction such as the fluctuation band restriction constraints the function of market and the marketization of exchange rate formation mechanism, the flexibility of exchange rate regime should be enhanced in the future though the decisive function of market has been raised step by step.The fourth chapter turns to policy efficiency of RMB's exchange rate regime. As an important economic institution, RMB's exchange rate regime relates to financial policy and monetary policy obviously. Through analyzing performance of its policy targets according to our country's facts, a conclusion is drawn that RMB's exchange rate regime performed well in pursuing its targets such as price stability, economic growth et al. but act as restraint to financial and monetary policy in varying degrees. Financial policy is used to mandate external balance. Monetary policy's independence is affected, the intrincic character of money supply is enhanced obviously and the operation of monetary policy enters into dilemma selection due to the adoption of actual fixed exchange rate regime.The fifth chapter is designed to investigate the resource allocation efficiency that is also called pareto efficiency. RMB's exchange rate regime is pursuing its economic structure adjusting function through the signaling function in resource allocation. This function is mainly embodied in the commodity resource allocation and basic financial resource allocation. Commodity imports and exports, foreign direct investment, foreign exchange reserve which are main bodies of balance of payments are selected as the objects, various testing methods have been used to get an appraisal. The above mentioned resources all have been accumulated with lower quality during different stages of RMB's exchange rate regime.The sixth chapter analyzes stabilization efficiency of China's exchange rate regime. The existed literature has shown that the stabilization function of exchange rate regime has been bounded to economic shocks and speculative shocks. So this chapter appraises the shocks in our economy development then estimates the stabilization efficiency. The probability of currency crisis is also pointed out in light of Krugman's crisis model.It is obvious that the efficiency of China's exchange rate regime is not high based on the tests in the four chapters (â…¢-â…¥). So the seventh chapter is devoted to the causes and countermeasures analysis. The imperfect efficiency is owe to factors like path dependence, its intrinsic defect, policy constraint and so on. After analyzing the causes of low efficiency, countermeasures are put forward. To raise the efficiency, the intervention mechanism of central bank should be reformed, domestic interest rate control should be removed step by step, a Chinese-featured target zone should be set up to normalize exchange rate management for Chinese yuan. Moreover, the related policies such as foreign trade policy, industrial policy, especially the policy regarding the convertibility of Chinese yuan should be put high on the agenda.Through the above mentioned analysis, some new ideas and opinions are put forward. The followings are the innovations of the thesis.Firstly, multiple analysis methods are used to complete this paper. Institutional analysis, positive analysis, normative study, structural method are dispersed in different chapters. The efficiency idea is the center of the thesis, so institutional analysis method is dispersed in the whole article.By using institutional analysis, the thesis finds that the temporary character of RMB's exchange rate regime is obvious. So a series of criterion are used to appraise the efficiency status of China's exchange rate regime. The foundation of these apprasing criterion gives an answer to "what will be the reasonable RMB's exchange rate regime" and countermeasures are analyzed to raise the efficiency. Qualititive analysis method is used here. Quantitive analysis is done by founding regression model to appraise the price stability function, resource allocation efficiency and approving economic growth function of China's exchange rate regime. Structural analysis method is dispersed in resource allocation efficiency analysis of China's exchange rate regime for the detail structure deposing.Many graphs and tablets are used in the analysis. So the conclusion is relatively reasonable and perfect. Much useful information is given. Furthermore, costs-gains analysis which is the classic analysis method in institutional analysis of efficiency is corvered in chapterâ…¢andâ…£in order to compare the costs and gains of adopting fixed exchange rate regime. China's exchange rate regime still needs to be reformed and made more perfectly because relatively high costs are exsisted during the course of pursusing its targets.Secondly, the contents are made newly from three aspects. Efficiency point of view is selected to analyze China's exchange rate regime and this method has seldomly been done by others; A series of appraising criterion are put forward which includes both quantitive and qualitative criterion such as s exchange rate formation mechanism, macro-economic policy incentive compatibility, parato efficiency and stabilization function mechanism; The macro-efficiency and micro-efficiency of China's exchange rate regime are analyzed in detail. So some defects such as focusing only on the micro-efficiency or macro-efficiency of RMB's exchange rate regime are deleted through the relatively detailed analysis.However, other works such as comparison of costs and gains of adopting fixed exchange rate regime still should be done because the whole appraision of efficiency of China's exchange rate regime can not be done by the thesis. And more, the correction of the conclusion might be affected covering the analsis of policy efficiency and resource allocation efficiency due to the shortage of data with the same sample period. So in the co-integration tests and regression analysis, the sample during period 1980 to 2007 is selected.