Foreign exchange markets in transition economies: China

The purpose of the paper is to examine the behaviour of exchange rates in China during the recent period of trade and exchange system reforms. A simple theoretical model based on the monetary approach is developed to explain the exchange rate in the parallel or black market, given the official and substantially controlled rate. The model is tested on quarterly data using the cointegration technique. error correction modeling and impulse response analysis. The results confirm the main features of the model and have policy implications concerning the use of devaluation and monetary policy for stimulating the economy, and the adoption of policies, which encourage black market activities. (C) 2001 Elsevier Science B.V. All rights reserved. JEL classification: F31.