Can a Rapidly-Growing Export-Oriented Economy Smoothly Exit an Exchange Rate Peg? Lessons for China from Japan's High-Growth Era
AbstractWe explore the parallels between Japanese currency policy after World War II and Chinese currency policy today. After two decades of pegging at 360 yen, Japan decoupled from the dollar on August 1971 and then repegged at a revalued rate of 308 yen. After stabilizing the exchange rate at this new level for about a year, greater flexibility was introduced. This phased adjustment - revaluation followed after a time by an increase in flexibility - bears more than a passing resemblance to recent Chinese policy initiatives. We analyze the impact of Japan's exit from its peg on exports and investment. The results point to sizeable effects of the yen's revaluation on both variables, especially investment. While our analysis suggests that a rapidly-growing, export-oriented economy can operate a heavily managed float despite the presence of capital controls and the absence of sophisticated foreign currency forward markets, it underscores the importance of managing the exchange rate with domestic conditions in mind and avoiding the kind of large real appreciation that would sharply compress profits and damage investment. For China this suggests starting with a modest band widening and a limited increase in flexibility, and not with a large step revaluation which could have a sharp negative impact on investment and growth. Our results thus provide support for the kind of measures taken at the end of July.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11625.
Date of creation: Sep 2005
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
- N15 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Asia including Middle East
- N65 - Economic History - - Manufacturing and Construction - - - Asia including Middle East
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-09-29 (All new papers)
- NEP-HIS-2005-09-29 (Business, Economic & Financial History)
- NEP-IFN-2005-09-29 (International Finance)
- NEP-SEA-2005-09-29 (South East Asia)
- NEP-TRA-2005-09-29 (Transition Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- "Tachi, Ryuichiro" & "Komiya, Ryutaro", 1960. "Under-Liquidity and Monetary Policy in Japan," Economic Review, Hitotsubashi University, vol. 11(3), pages 288-295, July.
- Michael Dooley & David Folkerts-Landau & Peter Garber, 2005.
"An essay on the revived Bretton Woods system,"
Federal Reserve Bank of San Francisco, issue Feb.
- Campa, Jose M. & Goldberg, Linda S., 2002.
"Exchange rate pass-through into import prices: A macro or micro phenomenon?,"
IESE Research Papers
D/475, IESE Business School.
- Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange Rate Pass-Through into Import Prices: A Macro or Micro Phenomenon?," NBER Working Papers 8934, National Bureau of Economic Research, Inc.
- Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports 149, Federal Reserve Bank of New York.
- Eichengreen, Barry, 2004. "Chinese Currency Controversies," CEPR Discussion Papers 4375, C.E.P.R. Discussion Papers.
- Hutchison, Michael & Walsh, Carl E., 1992. "Empirical evidence on the insulation properties of fixed and flexible exchange rates : The Japanese experience," Journal of International Economics, Elsevier, vol. 32(3-4), pages 241-263, May.
- Takatoshi Ito, 1987. "Capital Controls and Covered Interest Parity," NBER Working Papers 1187, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.