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China's exchange rate policy and the United States' trade deficits

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  • Abdol S. Soofi

Abstract

Purpose - This paper aims to critically examine China's exchange rate policy debate and discuss Chinese financial and capital control reform of recent years. Furthermore, using the empirical results based on a regional general equilibrium model, alternative methods are suggested of addressing American concerns about China's role in contributing towards global financial stability and American trade deficits with China. Design/methodology/approach - Regional general equilibrium input-output model. Findings - Sino-American debate on exchange rate policy is a matter of difference of opinion in sequencing of policies China has adopted to reduce capital account control and make her exchange rate regime more flexible. Using the final demand elasticity of exports it is observed that Chinese expansionary fiscal stimuli do have powerful effects in inducing additional exports for the United States and other Chinese trading partners. Research limitations/implications - The model does not include rest-of-the-world economies. Practical implications: - The results imply viable alternatives to renminbi/dollar appreciation policy in dealing with US-China persistent trade deficit. Originality/value - The paper suggests a new, empirical-based policy recommendation in dealing with the US trade deficit with China.

Suggested Citation

  • Abdol S. Soofi, 2009. "China's exchange rate policy and the United States' trade deficits," Journal of Economic Studies, Emerald Group Publishing, vol. 36(1), pages 36-65, January.
  • Handle: RePEc:eme:jespps:v:36:y:2009:i:1:p:36-65
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    Cited by:

    1. Alvi, Mohsin & Kamal, Usman, 2012. "Assessing Chinese currency regime (2012)," MPRA Paper 44551, University Library of Munich, Germany.
    2. M. Ershad HUSSAIN & Mahfuzul HAQUE, 2014. "Is the J-Curve a Reality in Developing Countries?," Journal of Economics and Political Economy, KSP Journals, vol. 1(2), pages 231-240, December.
    3. Jakub Borowski & Adam Czerniak & Krystian Jaworski, 2014. "The quest for determinants of Chinese exchange rate policy," Bank i Kredyt, Narodowy Bank Polski, vol. 45(5), pages 407-432.
    4. Hussain, M. Ershad & Haque, Mahfuzul, 2014. "Is the J-Curve a Reality in Developing Countries?," EconStor Open Access Articles, ZBW - German National Library of Economics, pages 231-240.

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