The Brics Exchange Rate Regime Choice: Comparative Study

Exchange rate regime plays an important role in the development of a country’s economy and international trade, and an appropriate Exchange Rate Regime can effectively control the inflation and promote economic growth. Otherwise it may increase the possibility of financial crisis, even cause a recession. Therefore, exchange rate regime, as a key part of international economic research, which exchange rate regime should a country chooses, and what are the determinant factors of the exchange rate regime are always the hot spot of academic study. After the financial crisis which happened in emerging market country in1990s, with the addition of various standards of exchange rate regime classification, scholar began to research on the choice of emerging market countries’exchange rate regime.The BRICs which all belong to emerging market, are highly concerned by the academic field of international economy, for their continued economic growth and the outstanding performance in the financial crisis happened in2008. The exchange rate regime, as a significant factor for international trading, capital flow promoting and economic equilibrium adjusting, inevitablely became the first thing that scholars need to research. What are the differences between the exchange rate regimes of the BRICs? What’s more, for China, the member of BRICs, recent years always faces the challenge of "double surpluses" and "exchange rate appreciation". So which way should the reformation of Chinese exchange rate regime turn to? Can we find some valuable experience from the comparative research of exchange rate regime choices of BRICs? The purpose of this paper is to solve these questions, and the below are our conclusions:Firstly, we found that the choice of the exchange rate regime is affected by the international environment and domestic policy, and from the long-term history view, more flexible exchange rate regime is the trend. As one of the important part of the International Monetary System, exchange rate regime is affected by the type of the international monetary system. In addition, the domestic economic reform policies have important affection on the choice of the exchange rate regime. Radical economic reform policy requires prices liberalize fast, and the asymptotic of economic reform policies meets slow price liberalization. Secondly, from the view of BRICs’ economic structure characteristics, the countries with small economic size, low level of economic development, underdeveloped industrial structure, and high degree of trade concentration tend to choose fixed exchange rate regime, which meets the exchange rate regime choice theory. When a country’s economic foundation is weak, and the economic development situation is deteriorating, the country needs to carry out a cautious exchange rate regime, and gradually liberalize the exchange rate and price system, and fixed exchange rate regime that pegs to the currency of the major trading nations plays a very good protective effect on its domestic economy. With the improvement of the domestic economic structure and terms of trade, the exchange rate regime needs to be more flexible, otherwise it will prevent the economic development.Thirdly, we can conclude from the ecometric results that the relationship between the determinat factors and exchange rate regime of BRICs’ meets the traditional exchange rate regime choice theories. The midium and long term determinat factors can explain the theories perfectly, in addition to the short-term determinat factors such as the inflation rate and the international capital flow indicators. In particular, economic size, economic openness shows a significant positive correlation with floating exchange rate regime, while the foreign reserves level and the degree of financial development is negatively related to the exchange rate regime.Accordingly, the choices of exchange rate regime of the BRICs’definitely manifests that there are no goog or not exchange rate regime, but suitable exchange rate regimes or not. The actual economic situation of one country determines the choice of the appropriate exchange rate regime, which at the same time denies the "Hypothesis of the Vanishing Intermediate Regime" theory. Different exchange rate regimes have their own advantages and disadvantages, but the approriate exchange rate regime can turn the disadvantages to advantages, and is also good for the successful economic transformation. On the contrary, if a country’s exchange rate regime is not combined with its domestic economic characteristics, policies, or the conversion time, that will cause enormous switching costs. What’s more, it may result in a serious financial crisis.