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Chinese Exchange Rate Regimes and the Optimal Basket Weights for the Rest of East Asia

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  • Etsuro Shioji
Abstract
China has recently announced its intention to fundamentally reform its currency regime in the future. This paper studies how the country's choice of its exchange rate regime interacts with the rest of East Asia's choice. For that purpose, I build a four country new open economy macroeconomic model that consists of East Asia, China, Japan and the US. It is assumed that both East Asia and China peg their respective currencies to certain weighted averages of the Japanese yen and the US dollar. Each side takes the other's choice as given and chooses its own basket weight. The game is characterized by strategic complementarity. It is shown that the currency in which the traded goods prices are quoted plays an important role. The paper considers two alternative cases, the standard producer currency pricing (PCP) case and the vehicle currency pricing (VCP) case in which all the prices of traded goods are preset in the units of US dollars. In the PCP case, trade volume is the important determinant of the equilibrium basket weights, and the balances of trade are inconsequential. However, in the VCP case, trade balances between the four economies are shown to play an important role. Under VCP, and starting from realistic initial trade balances, the equilibrium basket weights far exceed what are implied by Japan's presence in international trade.

Suggested Citation

  • Etsuro Shioji, 2006. "Chinese Exchange Rate Regimes and the Optimal Basket Weights for the Rest of East Asia," Discussion papers 06024, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:06024
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    References listed on IDEAS

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    Cited by:

    1. Yoshino, Naoyuki & Kaji, Sahoko & Asonuma, Tamon, 2014. "Dynamic Analysis of Exchange Rate Regimes: Policy Implications for Emerging Countries in Asia," ADBI Working Papers 502, Asian Development Bank Institute.
    2. Yoshino, Naoyuki & Kaji, Sahoko & Asonuma, Tamon, 2016. "Exchange rate regime switching in Malaysia and Singapore in response to China’s move to a basket peg: A DSGE analysis," Journal of Asian Economics, Elsevier, vol. 46(C), pages 17-37.
    3. OGAWA Eiji & SHIMIZU Junko, 2007. "Progress toward a Common Currency Basket System in East Asia," Discussion papers 07002, Research Institute of Economy, Trade and Industry (RIETI).

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