The Difficulties of the Chinese and Indian Exchange Rate Regimes

China and India have both attempted distorting the exchange rate in order to foster exports-led growth. This is described as the Bretton Woods II framework, where developing countries buy bonds in the US and keep undervalued exchange rates, in order to foster export-led growth. The costs and benefits of this approach need to factor in the extent to which monetary policy is distorted by the pursuit of exchange rate policy. In this paper, dates of structural change are identified, and the characteristics of the de facto exchange rate regime, for both countries are examined. These results utilise recent developments in the econometrics of structural change. Business cycle conditions and the short-term rate (expressed in real terms) in both India and China are also examined. [NIPFP WP No 2009-62].