Structural Changes in the RMB Exchange Rate Mechanism

Abstract

This paper examines structural changes in the exchange rate mechanism of China. For this purpose, we propose a predictive regression model that incorporates three factors of influence on the central parity rate: a smoothing factor, a market factor, and a basket factor. We first apply the model to analyze the effects of twelve exchange rate reforms since 2005, treating these reforms as pre-determined structural breaks. Among other results, we find that the main impact of introducing “counter-cyclical factor” is to weaken the role of the basket factor. Furthermore, we estimate structural breaks in data, assuming that the number and dates of breaks are unknown. We find that the majority of estimated breaks occur within the neighborhood of exchange rate reforms and that the “8.11” reform of 2015 is arguably the most important structural change after 2005 in the econometric sense.