The European Journal of Comparative Economics

ISSN: 1824-2979

EJCE Year: 2009, June. Volume: 6 - Issue: 1

The difficulties of the Chinese and Indian exchange rate regimes

by Ila Patnaik and Ajay Shah

Start page: 157 - End page: 173

Keywords: Exchange rate regime, sterilised intervention, monetary policy, India, China

Jel code: E52; E58

Abstract:

China and India have both sought control over the exchange rate in order to maintain export competitiveness, manage current account balance, and pursue independent monetary policy. In this paper, we examine structural change in the Chinese and Indian de facto exchange rate regimes, focusing on the period from 1998 to 2007. With increasing capital account openness, exchange rate inflexibility has been associated with significant monetary policy distortions. In both countries, the short-term rate expressed in real terms dropped, and achieved very low values, in the unprecedented business cycle expansion of the early 2000s. In the Indian case, difficulties of sterilisation led to a modification of the exchange rate regime, moving towards greater flexibility. In China, in contrast, the exchange rate regime did not change.

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