LexisNexis(TM) Academic - Document
LexisNexis(TM) Academic - DocumentCopyright 2005 The Financial Times Limited
Financial Times (London, England)
July 27, 2005 Wednesday
London Edition 1
SECTION: LEX COLUMN; Pg. 18
LENGTH: 246 words
HEADLINE: Currency regimes THE LEX COLUMN:
BODY:
Abandoning a peg is challenging. In Latin America and south-east Asia in the 1990s, leaving a fixed exchange rate regime led to recession.
Although China's move to a managed float resembles a dignified stroll rather than a disorderly scamper for the exit, there are still lessons it can draw from the heated academic debate about how best to guarantee a smooth transition.
A study by the Centre for Economic Policy Research suggests that, for governments hoping to protect growth prospects, capital controls can help. More surprisingly, it also finds that many variables that might be expected to be significant in maintaining stability and growth are, in fact, not. For example, policy rectitude in the form of a balanced budget or current account does not make any detectable difference, nor does the concentration of trade with the anchor currency country, nor the level of foreign debt.
While China meets many of the criteria to ensure a smooth transition, it is clear the new regime will put pressure on its management skills. A priority will be to avoid providing a one-way bet for speculators who believe, contrary to the central bank's protestations, that the currency will appreciate further. In effect, this means it will have to intervene more to control the new crawling rate than it did to protect the abandoned peg. Non-deliverable forwards show the renminbi 5 per cent higher against the dollar in a year, demonstrating that, so far, the speculators are unconvinced.
LOAD-DATE: July 27, 2005
Financial Times (London, England)
July 27, 2005 Wednesday
London Edition 1
SECTION: LEX COLUMN; Pg. 18
LENGTH: 246 words
HEADLINE: Currency regimes THE LEX COLUMN:
BODY:
Abandoning a peg is challenging. In Latin America and south-east Asia in the 1990s, leaving a fixed exchange rate regime led to recession.
Although China's move to a managed float resembles a dignified stroll rather than a disorderly scamper for the exit, there are still lessons it can draw from the heated academic debate about how best to guarantee a smooth transition.
A study by the Centre for Economic Policy Research suggests that, for governments hoping to protect growth prospects, capital controls can help. More surprisingly, it also finds that many variables that might be expected to be significant in maintaining stability and growth are, in fact, not. For example, policy rectitude in the form of a balanced budget or current account does not make any detectable difference, nor does the concentration of trade with the anchor currency country, nor the level of foreign debt.
While China meets many of the criteria to ensure a smooth transition, it is clear the new regime will put pressure on its management skills. A priority will be to avoid providing a one-way bet for speculators who believe, contrary to the central bank's protestations, that the currency will appreciate further. In effect, this means it will have to intervene more to control the new crawling rate than it did to protect the abandoned peg. Non-deliverable forwards show the renminbi 5 per cent higher against the dollar in a year, demonstrating that, so far, the speculators are unconvinced.
LOAD-DATE: July 27, 2005
posted by Eastlaw at Wednesday, July 27, 2005
0 Comments:
Post a Comment
<< Home