Diversifying reference currency basket and decreasing degree of flexibility in exchange policy of China

抄録

This study aims to determine the de facto foreign exchange rate regime of the renminbi (RMB) from 2005 to 2016. To address this problem, I employ the implicit currency basket model proposed by Frankel and Wei (1994) to estimate the components of RMB’s reference currency basket and the exchange rate flexibility model with a Markov-switching process to identify the possible regime switches. The main findings are as follows. First, the implicit currency basket model shows that the US dollar is still the anchor currency of RMB, with the highest weight in RMB’s reference basket, although it has decreased since August 2015. Second, the regime switches evaluated by examining exchange rate flexibility show that the regime differed over time. Indeed, the Chinese monetary authorities implemented heavy regulations on RMB flexibility under unstable external conditions such as the global financial crisis and period of RMB depreciation.