EVALUATING THE XR TARGETING POLICY USING SOME ECONOMIC STABILITY VARIABLES - THE CHINESE ECONOMY AS MODEL FOR THE PERIOD 1990-2023

Abstract

The research addressed the evaluation of the exchange rate (referred to as XR henceforth) targeting policy using some economic stability variables in China, as the XR targeting policy is a modern and effective method within the targeting mechanisms, to achieve economic stability, which is the prelude to achieving economic growth and development. Some developed countries, including China, seek to adopt the XR targeting policy to achieve the planned goals. Despite the great benefits achieved by the XR targeting policy, it has some negative aspects, as it hinders the likelihood of using a monetary policy which is not dependent, and the impact of shocks that occur in the country of the anchor currency can be transmitted internally. In addition to what was mentioned, the local currency in the target country can be exposed to a speculative attack. The research relied on the advanced econometrics method, by using the autoregressive distributed lag model ARDL, for measuring the relationship between some economic stability variables (GDP, trade balance, unemployment, international reserves - as independent variables) and the real XRs (dependent variable). The most important conclusions reached by the research are that, based on the standard tests and short-term parameters, the unemployment rate significantly affects the real XRs, while international reserves do not significantly affect the real XRs. As for the long-term parameters, the gross domestic product, the trade balance and the index of the consumer price significantly affect real XRs, while international reserves have a significant but weak impact.