Assignment 1
FNCE 4467

What exchange rate regime do you think the Bank of China followed until July, 2005? Justify your opinion.

The monetary policy framework of China was the monetary aggregate target in which the exchange rate arrangement was the Crawl-like arrangement. The de facto monetary policy framework was an exchange rate anchored to the dollar (Brean, Eun, Resnick, 2014). As shown in figure 1 during 2003 to mid-2005 the Chinese Yuan exchange rate was fixed with the USD at around 8.28 Yuan/Dollar. The Chinese fixed exchange rate against the U.S dollar was already set more than a decade ago. Furthermore, by having a fixed rate, the Peoples’ Bank of China (PBOC) made China able to maintain its goods at a lower price compared to the rest of the world, which help them reach a faster economic growth and great foreign excess reserves (China Fixes Value of Yuan, 2003).

Figure 1 Figure 2

What regime do you believe the Bank of China was following from July, 2005 to July, 2008? Justify your opinion.

The Bank of China followed the float rate regime from 2005 to 2008. In which the exchange rate is tied to a basket of currencies in which U.S dollar, euro, yen, and Korean won were the main ones. The regime allowed movement up to +/- 0/5% (Frankel, 2009). as seen in figure 3, the floating regime created volatility in the Yuan as seen in the upward trend of the daily exchange rate USD/RMB compared to figure 1 between 2003-05.

Figure 3

What regime do you think the Bank of China has been following since July, 2008? Justify your opinion.

Figure