Should China Let Her Exchange Rate Float? The Experience of Developing Countries

Abstract

We empirically investigate the relationship between economic growth and the choice of exchange rate regimes for forty-two developing countries during the period 1974–1994. We consider several model specifications and three classification schemes of exchange rate regime: the IMF de jure classification, the Reinhart and Rogoff natural classification, and the Levy-Yeyati and Sturzenegger de facto classification. Statistical tests appear to favor the endogenous switching regression model, which encompasses specifications used in previous studies. Holding investment, openness and government consumption constant, we conjecture that should China switch from pegged to floating exchange rate regime, her growth rate is likely to fall by one to two percent.