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A Role Model for China? Exchange Rate Flexibility and Monetary Policy in Japan

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  • Gunther Schnabl
  • Christian Danne

Abstract

Few papers have tried to project how Chinese monetary policy will behave under flexible exchange rates. As Japan provides an important role model for China, this paper studies the role of the yen/dollar exchange rate for Japanese monetary policy after the shift of Japan from a fixed to a floating exchange rate regime. The econometric estimations allow for regime shifts in the impact of the exchange rate on monetary policy. The results show that the exchange rate had a substantial impact on Japanese monetary policy in periods of appreciation. This implies rising uncertainty and that repeated attempts to soften the appreciation pressure by interest rate cuts have led Japan into the liquidity trap.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-07/cesifo1_wp2051.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2051.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2051

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Keywords: Yen; Yuan; Japan; China; monetary policy; exchange rate regime;

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References

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  2. C. Randall Henning, 1994. "Currencies and Politics in the United States, Germany, and Japan," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 15.
  3. Hillebrand, Eric & Schnabl, Gunther, 2006. "A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility," Working Paper Series 0650, European Central Bank.
  4. Ronald McKinnon & Gunther Schnabl, 2004. "The Return to Soft Dollar Pegging in East Asia. Mitigating Conflicted Virtue," International Finance 0406007, EconWPA, revised 07 Jul 2004.
  5. Esaka, Taro, 2000. "The Louvre Accord and central bank intervention: was there a target zone?," Japan and the World Economy, Elsevier, vol. 12(2), pages 107-126, May.
  6. William R. Cline, 2005. "The Case for a New Plaza Agreement," Policy Briefs PB05-04, Peterson Institute for International Economics.
  7. Gunther Schnabl & Paul De Grauwe, 2004. "Nominal versus Real Convergence with Respect to EMU Accession - EMU Entry Scenarios for the New Member States," International Finance 0403008, EconWPA, revised 05 Jul 2004.
  8. Marvin Goodfriend & Eswar Prasad, 2006. "A Framework for Independent Monetary Policy in China," IMF Working Papers 06/111, International Monetary Fund.
  9. Ronald McKinnon & Gunther Schnabl, 2006. "China's Exchange Rate and International Adjustment in Wages, Prices and Interest Rates: Japan Déjà Vu?," CESifo Economic Studies, CESifo, vol. 52(2), pages 276-303, June.
  10. Rishi Goyal & Ronald McKinnon, 2003. "Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and the Fall in Bank Lending," The World Economy, Wiley Blackwell, vol. 26(3), pages 339-363, 03.
  11. Ronald McKinnon, 2007. "Why China Should Keep Its Dollar Peg," International Finance, Wiley Blackwell, vol. 10(1), pages 43-70, 03.
  12. Ronald I. McKinnon & Kenichi Ohno, 1997. "Dollar and Yen: Resolving Economic Conflict between the United States and Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262133350, December.
  13. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2005. "Why the renminbi might be overvalued (but probably isn’t)," Proceedings, Federal Reserve Bank of San Francisco.
  14. McKinnon, Ronald I., 2004. "The East Asian dollar standard," China Economic Review, Elsevier, vol. 15(3), pages 325-330.
  15. Schnabl, Gunther & Hoffmann, Andreas, 2007. "Geldpolitik, vagabundierende Liquidität und platzende Blasen in neuen und Aufstrebenden Märkten
    [Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets]
    ," MPRA Paper 4019, University Library of Munich, Germany.
  16. Zakoian, Jean-Michel, 1994. "Threshold heteroskedastic models," Journal of Economic Dynamics and Control, Elsevier, vol. 18(5), pages 931-955, September.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Four Reasons Why The EXIT Will Fail
    by Mario Rizzo in Think Markets on 2009-11-10 02:46:02
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Cited by:
  1. Hoffmann, Andreas, 2009. "Fear of depression - Asymmetric monetary policy with respect to asset markets," MPRA Paper 17522, University Library of Munich, Germany.
  2. 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.
  3. Elsamadisy, Elsayed Mousa & Alkhater, Khalid Rashid & Basher, Syed Abul, 2013. "Pre- versus Post-Crisis Central Banking in Qatar," MPRA Paper 45310, University Library of Munich, Germany.
  4. Schnabl, Gunther & Hoffmann, Andreas, 2007. "Geldpolitik, vagabundierende Liquidität und platzende Blasen in neuen und Aufstrebenden Märkten
    [Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets]
    ," MPRA Paper 4019, University Library of Munich, Germany.
  5. Hoffmann, Andreas, 2013. "Did the Fed and ECB react asymmetrically with respect to asset market developments?," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 197-211.
  6. Gunther Schnabl, 2007. "Exchange Rate Volatility and Growth in Emerging Europe and East Asia," CESifo Working Paper Series 2023, CESifo Group Munich.
  7. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
  8. 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.
  9. Gunther Schnabl, 2012. "Monetary Policy Reform in a World of Central Banks," Global Financial Markets Working Paper Series 26-2012, Friedrich-Schiller-University Jena.
  10. Bas, Maria & Ledezma, Ivan, 2007. "Market Access and the Evolution of within Plant Productivity in Chile," Economics Papers from University Paris Dauphine 123456789/6913, Paris Dauphine University.
  11. Hoffmann, Andreas & Schnabl, Gunther, 2009. "A Vicious Cycle of Manias, Crashes and Asymmetric Policy Responses - An Overinvestment View," MPRA Paper 18532, University Library of Munich, Germany.
  12. William Miles & Sam Schreyer, 2012. "Is monetary policy non-linear in Indonesia, Korea, Malaysia, and Thailand? A quantile regression analysis," Asian-Pacific Economic Literature, Asia Pacific School of Economics and Government, The Australian National University, vol. 26(2), pages 155-166, November.

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