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The external and domestic side of macroeconomic adjustment in China

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  • Straub, Roland
  • Thimann, Christian

Abstract

This paper sheds new light on the external and domestic dimension of China's exchange rate policy. It presents an open-economy model to analyse the macroeconomic adjustment process in China under both flexible and fixed exchange rate regimes. The model-based results indicate that persistent current account surpluses in China cannot be rationalized, under general circumstances, by the occurrence of permanent technology or labour supply shocks. As a result, to understand the macroeconomic adjustment process in China it is necessary to mimic the effects of potential inefficiencies, which induce the subdued response of domestic absorption to permanent income shocks, thereby causing the observed positive unconditional correlation of the trade balance and output. The paper argues that these inefficiencies can be potentially seen as a by-product of the fixed exchange rate regime, and can be approximated by a stochastic tax on domestic consumption or a time-varying transaction cost technology related to money holdings. Our results indicate that a fixed exchange rate regime with financial market distortions, as defined above, might induce negative effects on GDP growth in the medium term compared with a more flexible exchange rate regime.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Asian Economics.

Volume (Year): 21 (2010)
Issue (Month): 5 (October)
Pages: 425-444

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Handle: RePEc:eee:asieco:v:21:y:2010:i:5:p:425-444

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Web page: http://www.elsevier.com/locate/asieco

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Keywords: DSGE modelling China Current account;

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References

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Cited by:
  1. Patrick Blagrave & Peter Elliott & Roberto Garcia-Saltos & Douglas Hostland & Douglas Laxton & Fan Zhang, 2013. "Adding China to the Global Projection Model," IMF Working Papers 13/256, International Monetary Fund.
  2. Yavuz Arslan & Mustafa Kilinc & M. Ibrahim Turhan, 2011. "Global Imbalances, Current Account Rebalancing and Exchange Rate Adjustments," Working Papers 1127, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  3. Bonatti, Luigi & Fracasso, Andrea, 2013. "Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1044-1078.
  4. Ettore Dorrucci & Gabor Pula & Daniel Santabárbara, 2013. "China’s economic growth and rebalancing," Banco de Espa�a Occasional Papers 1301, Banco de Espa�a.
  5. Luigi Bonatti & Andrea Fracasso, 2011. "Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets?," Department of Economics Working Papers 1105, Department of Economics, University of Trento, Italia.

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