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China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience

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  • McKinnon, Ronald
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    Abstract

    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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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-35.

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    Date of creation: 2006
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    Handle: RePEc:zbw:zewdip:4619

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    Keywords: exchange rate; current account; China; Japan;

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    1. Zhang, Xiaobo & Tan, Kong-Yam, 2004. "Blunt to sharpened razor," DSGD discussion papers 13, International Food Policy Research Institute (IFPRI).
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    Cited by:
    1. Ying Wu, 2010. "Exchange Rates and Prices under Processing Trade: A Macroeconomic Analysis," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(3), pages 345-357, September.
    2. Rod Tyers & Iain Bain, 2008. "American and European Financial Shocks: Implications for Chinese Economic Performance," ANU Working Papers in Economics and Econometrics 2008-491, Australian National University, College of Business and Economics, School of Economics.
    3. Cho-Hoi Hui & Chi-Fai Lo & Tsz-Kin Chung, 2008. "Market Expectation of Appreciation of the Renminbi," Working Papers 0803, Hong Kong Monetary Authority.
    4. Robert Lafrance, 2008. "China's Exchange Rate Policy: A Survey of the Literature," Discussion Papers 08-5, Bank of Canada.

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