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Exchange Rate or Wage Changes in International Adjustment? Japan and China versus the United States

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  • McKinnon, Ronald
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    Abstract

    Under the world dollar standard, a discrete appreciation by a dollar creditor country of the United States, such as China or Japan, has no predictable effect on its trade surplus. Currency appreciation by the creditor country will slow its economic growth and eventually cause deflation but cannot compensate for a savinginvestment imbalance in the United States. Under a fixed exchange rate, however, differential adjustment in the rate of growth of money wages will more accurately reflect international differences in productivity growth. International competitiveness will be better balanced between high-growth and low-growth economies, as between Japan and the U.S. from in 1950 to 1971 and China and the U.S. from 1994 to 2005, when the peripheral country?s dollar exchange rate is fixed so that its wage growth better reflects its higher productivity growth. The qualified case for China moving toward greater flexibility in the form of a very narrow band for the yuan/dollar exchange rate, as a way of decentralizing foreign exchange transacting, is discussed. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 05-64.

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    Date of creation: 2005
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    Handle: RePEc:zbw:zewdip:4547

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    Keywords: exchange rate; dollar standard; trade balance; China; Japan;

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    1. Zhang, Xiaobo & Tan, Kong-Yam, 2004. "Blunt to sharpened razor," DSGD discussion papers, International Food Policy Research Institute (IFPRI) 13, International Food Policy Research Institute (IFPRI).
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    Cited by:
    1. Haihong Gao, 2006. "Real Exchange Rate in China : A Long-run Perspective," Macroeconomics Working Papers 21969, East Asian Bureau of Economic Research.
    2. 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.

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