For creditor countries on the periphery of the dollar standard such as China with current account surpluses, foreign mercantile pressure to appreciate their currencies and become more flexible is misplaced. Just the expectation of variable exchange appreciation seriously disrupts the natural tendency for wage growth to balance productivity growth and thus worsens the (incipient) deflation that China now faces. It could create a zero-interest liquidity trap in financial markets that leaves the central bank helpless to combat future deflation arising out of actual currency appreciation, as with the earlier experience of Japan. Exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable effect on the trade surpluses of creditor economies. --
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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number
06-35.
Find related papers by JEL classification: F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions F31 - International Economics - - International Finance - - - Foreign Exchange
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