The Choice Of Exchange Rate Regimes Based On Capital Account Opening

The choice of exchange rate regimes is always a controversial area of research in economics among domestic and foreign scholars. A number of studies showed that ,due to the disversification of the factors deciding exchange rate regimes, the choice of exchange rate regimes is a very complicated problem and no exchange rate regime is suitable to any countries or different development phase of some country. Therefore, there has not been a unified theory frame on the choice of regimes until now. Researches abroad are earlier and the contents are plentiful, while domestic researches started in 1990s and most are qualitative analysis, quantitative analysis is few. The choice of exchange rate regimes has an extremely important effect on economic development, financial stability and international payments of any countries, so it is very necessary to study the subject of the choice of exchange rate regimes under the condition of gradually opening finance.This paper first introduces the former scholars'research results and the literature about the choice of exchange rate regimes, and points out their limitations. Then, a model about the choice of regimes is established considering real costs of unanticipated volatility of real exchange rate owing to the dollarization of liabilities in emerging markets. The model links the choice of exchange rate regimes to the three parameters: the elasiticities of output with respect to the level of the real exchange rate, the semi-elasicity of output with respect to the level of the real interest rate and the elasticity of output with respect to unanticipated exchange rate changes. A optimal exchange rate regime can be decided only by estimating the three parameters above. The model established in this paper is suitable to the present situation of Chinese finance opening. It improves that the elasticity of exchange rate is concerned with the extent of capital account opening, the degree of a country's economic openness, the transmission coefficient and the weights of policy objects endowed by currency authority. The test indicates that the current Renminbi elastic scope should be fluctuated with 12.5% around the balanced exchange rate. The result is very important.