Choosing an exchange rate regime during economic transition : the case of China.

Abstract

The choice of an appropriate exchange rate regime during economic transition is investigated through the case of China's 1994 reform programme. Within a game-theoretic framework, the paper compares welfare under alternative policy regimes. While not upsetting government welfare, China's exchange rate unification through a floating rate has compelling benefits as a means of aborting the multiple practice. Given the choice of a flexible rate regime for convertibility, numerical simulations show a managed floater is favourable and may additionally mitigate the credibility problem associated with convertibility. Simulation outcomes also reveal China's policy preference is to place a higher weight on competitiveness than on inflation.