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The Inflexible Yuan and Global Imbalances

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  • Makin Anthony J

    () (Griffith University)

Abstract

This paper evaluates China's exchange rate policy and current account surplus in the context of its rapid development. Recognizing that external imbalances reflect divergent national production and expenditure growth within both China and its trading partners, it contends that yuan exchange rate undervaluation against major currencies is central to any explanation of global imbalances. This misalignment artificially assists China's output growth and limits its household consumption, thereby slowing the rise in China's living standards. Meanwhile, due to currency misalignment, China's industrialized trading partners, most notably the United States and European Union, simultaneously experience larger bilateral current account deficits with China, lower output, lower saving and higher investment than otherwise. Further significant appreciation of China's exchange rate would simultaneously reduce China's huge trade surplus and the bilateral deficits of its trading partners, thereby alleviating international trade tensions.

Suggested Citation

  • Makin Anthony J, 2008. "The Inflexible Yuan and Global Imbalances," Global Economy Journal, De Gruyter, vol. 8(3), pages 1-12, September.
  • Handle: RePEc:bpj:glecon:v:8:y:2008:i:3:n:7
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    References listed on IDEAS

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    1. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    2. Tatom John A, 2007. "The US-China Currency Dispute: Is a Rise in the Yuan Necessary, Inevitable or Desirable?," Global Economy Journal, De Gruyter, vol. 7(3), pages 1-15, October.
    3. Jacob Frenkel & Assaf Razin, 1996. "Fiscal Policies and Growth in the World Economy," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262561042, January.
    4. Anna J. Schwartz, 2005. "Dealing with Exchange Rate Protectionism," Cato Journal, Cato Journal, Cato Institute, vol. 25(1), pages 97-106, Winter.
    5. Oberpriller Christian M. & Sauer Beate & Sell Friedrich L., 2008. "The Undervaluation of the Yuan Dispute: Is a Repetition of Germany's Experience in 1969 Necessary, Inevitable or Desirable? A Comment and Reply to John A. Tatom," Global Economy Journal, De Gruyter, vol. 8(2), pages 1-15, June.
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    Cited by:

    1. Gan, Christopher & Ward, Bert & Ting, Su Ting & Cohen, David A., 2013. "An empirical analysis of China's equilibrium exchange rate: A co-integration approach," Journal of Asian Economics, Elsevier, vol. 29(C), pages 33-44.
    2. Yusoff Mohammed B., 2010. "Bilateral Trade Balance, Exchange Rates, and Income: Evidence from Malaysia," Global Economy Journal, De Gruyter, vol. 9(4), pages 1-21, January.
    3. Horvath, Denis & Sulikova, Veronika & Gazda, Vladimir & Sinicakova, Marianna, 2013. "The distance-based approach to the quantification of the world convergences and imbalances - comparisons across countries and factors," MPRA Paper 45033, University Library of Munich, Germany.

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