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Should RMB appreciate ? A analytical framework

Author

Listed:
  • Yong He

    (LEPII - Laboratoire d'Economie de la Production et de l'Intégration Internationale - UPMF - Université Pierre Mendès France - Grenoble 2 - CNRS - Centre National de la Recherche Scientifique)

Abstract

Using a simple two-market-model, we show that under a fixed exchange rate regime, three policy instruments are available to equilibrate the balance of payments. From pro-economic growth point of view, monetary reevaluation is the worst solution. However, from the point of view of financial and monetary stability, a financial expansion risk to increase budget deficit and monetary expansion is constrained by bad debt rate. Applying the model to China, we find that since 1990s, Chinese government has excessively used financial and monetary policies to maintain economic growth and to ease from the pressure on monetary reevaluation due to the balance of payments in surplus. Its budget deficit has been creasing and in particular its domestic credit to GDP ratio has been among the highest in the world. To insure long term economic sustainability, China could no longer exclude the monetary reevaluation from its choice of policy instruments.

Suggested Citation

  • Yong He, 2005. "Should RMB appreciate ? A analytical framework," Post-Print halshs-00097787, HAL.
    • Handle: RePEc:hal:journl:halshs-00097787
    as

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