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China's Exchange Rate and International Adjustment in Wages, Prices and Interest Rates: Japan Déjà Vu?

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  • Ronald McKinnon
  • Gunther Schnabl

Abstract

China's fixed its exchange rate at 8.28 yuan to the dollar from 1994 to July 2005, and has only allowed for a small appreciation since then. China's productivity growth has been very high relative to most other countries: its trade surplus has been rising and it continues to accumulate large dollar exchange reserves. Many observers, including high officials in the US government, take this as per se evidence that the renminbi is undervalued. To balance China's international competitiveness and reduce its trade surplus, they want the renminbi to appreciate much more. This common presumption of renminbi undervaluation is wrong, and its appreciation need not reduce China's trade surplus but would cause serious deflation in China. To show this, we consider international adjustment between China and the US from both an asset market and a labor market perspective, and compare this to Japan's unsuccessful appreciation of the yen from 1971 to 1995. During a time of economic catch-up and rapid financial transformation, fixing the exchange rate is the preferred way of anchoring the domestic price level. (JEL codes: F15, F31, F33) Copyright 2006, Oxford University Press.

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Bibliographic Info

Article provided by CESifo in its journal CESifo Economic Studies.

Volume (Year): 52 (2006)
Issue (Month): 2 (June)
Pages: 276-303

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Handle: RePEc:oup:cesifo:v:52:y:2006:i:2:p:276-303

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References

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  1. Ronald McKinnon & Gunther Schnabl, 2003. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Working Papers 03001, Stanford University, Department of Economics.
  2. Gunther Schnabl & Dirk Baur, 2005. "Purchasing Power Parity: Granger Causality Tests for the Yen- Dollar Exchange Rate," International Finance 0506006, EconWPA.
  3. Gunther Schnabl & Christian Danne, 2005. "The Changing Role of the Yen/Dollar Exchange Rate for Japanese Monetary Policy," International Finance 0503001, EconWPA.
  4. McKinnon, Ronald & Schnabl, Gunther, 2006. "Devaluing the dollar: A critical analysis of William Cline's case for a New Plaza Agreement," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 683-694, September.
  5. Jeffrey Frankel, 2006. "On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," CESifo Economic Studies, CESifo, vol. 52(2), pages 246-275, June.
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Citations

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Cited by:
  1. Gunther Schnabl & Andreas Hoffmann, 2008. "Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View," The World Economy, Wiley Blackwell, vol. 31(9), pages 1226-1252, 09.
  2. Heijdra, Ben J. & Ligthart, Jenny E., 2007. "Fiscal policy, monopolistic competition, and finite lives," Journal of Economic Dynamics and Control, Elsevier, vol. 31(1), pages 325-359, January.
  3. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, vol. 32(1), pages 70-91, March.
  4. Zhang, Zhibai, 2010. "A comparison of the BEER and Penn effect models via their applications on the valuation of the Renminbi," MPRA Paper 40649, University Library of Munich, Germany.
  5. Gunther Schnabl & Christian Danne, 2007. "A Role Model for China? Exchange Rate Flexibility and Monetary Policy in Japan," CESifo Working Paper Series 2051, CESifo Group Munich.
  6. Aliyu, Shehu Usman Rano, 2009. "Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation," MPRA Paper 16319, University Library of Munich, Germany, revised 10 Jun 2009.
  7. Straub, Roland & Thimann, Christian, 2010. "The external and domestic side of macroeconomic adjustment in China," Journal of Asian Economics, Elsevier, vol. 21(5), pages 425-444, October.
  8. Rahman, Mizanur, 2008. "The Impact of a Common Currency on East Asian Production Networks and China’s Exports Behavior," MPRA Paper 13931, University Library of Munich, Germany.
  9. Ronald McKinnon & Gunther Schnabl, 2012. "China and Its Dollar Exchange Rate: A Worldwide Stabilising Influence?," The World Economy, Wiley Blackwell, vol. 35(6), pages 667-693, 06.
  10. Gunther Schnabl & Christina Ziegler, 2008. "Exchange Rate Regime and Wage Determination in Central and Eastern Europe," CESifo Working Paper Series 2471, CESifo Group Munich.
  11. Risheng Mao & John Whalley, 2011. "Ownership Characteristics, Real Exchange Rate Movements and Labor Market Adjustment in China," NBER Working Papers 17565, National Bureau of Economic Research, Inc.
  12. Ziegler, Christina, 2012. "Monetary policy under alternative exchange rate regimes in Central and Eastern Europe," Working Papers 104, University of Leipzig, Faculty of Economics and Management Science.

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