Study On The Determinants Of The Choice Of RMB Exchange Rate Regime

This Paper investigates the determinants of exchange rate regime choice of China during 1985-2004. Regression results show that (i) government temptation to inflate, exchange rate risk exposure, and some traditional optimal currency area criteria like economic size, economic development level, and inflation difference have evident influence on the exchange rate regime choice of China, and (ii) for exchange rate risk exposure, inflation difference and temptation to inflate, results are found consistent with theories, while results for economic size, economic development and capital mobility are inconsistent with traditional OCA theory, which explains the low flexibility of RMB exchange rate regime and the necessity of RMB exchange rate regime reform of July 21st, 2005 with scientific proof.