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China’s Real Exchange Rate Puzzle

  • Tyers, Rod

    ()

    (Australian National University)

  • Golley, Jane

    (Australian National University)

International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which economic growth is due to relative tradable productivity gains which cause rising relative non-traded prices. The puzzle is that, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate showed no tendency to appreciate during 1990-2006. Resolution requires allowance for failures of the law of one price for traded goods, which expands the array of determinants to include labour supply growth and demand switches due to changes in investment interest premia, saving rates and trade distortions. The sensitivity of China’s real exchange rate to these determinants is reviewed with the results confirming that financial outflows have been prominent depreciating forces since 1997. These, along with WTO accession trade reforms, have more than offset the Balassa-Samuelson productivity effects.

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Article provided by Center for Economic Integration, Sejong University in its journal Journal of Economic Integration.

Volume (Year): 23 (2008)
Issue (Month): ()
Pages: 547-574

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Handle: RePEc:ris:integr:0445
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  1. Paul Bergin & Reuven Glick & Alan M. Taylor, 2004. "Productivity, Tradability, and the Long-Run Price Puzzle," NBER Working Papers 10569, National Bureau of Economic Research, Inc.
  2. Rod Tyers & Iain Bain & Jahnvi Vedi, 2007. "The Global Economic Implications of Freer Skilled Migration," DEGIT Conference Papers c012_028, DEGIT, Dynamics, Economic Growth, and International Trade.
  3. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2001. "Understanding European Real Exchange Rates," Vanderbilt University Department of Economics Working Papers 0120, Vanderbilt University Department of Economics.
  4. Rod Tyers & Jane Golley & Bu Yongxiang & Ian Bain, 2006. "China's Economic Growth and its Real Exchange Rate," ANU Working Papers in Economics and Econometrics 2006-476, Australian National University, College of Business and Economics, School of Economics.
  5. Rod Tyers & Jane Golley, 2006. "China's Growth to 2030: Demographic Change and the Labour Supply Constraint," PGDA Working Papers 1106, Program on the Global Demography of Aging.
  6. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  7. Ken Miyajima, 2005. "Real Exchange Rates in Growing Economies: How Strong is the Role of the Nontradables Sector?," IMF Working Papers 05/233, International Monetary Fund.
  8. Carsten A. Holz, 2005. "New Capital Estimates for China," Development and Comp Systems 0504011, EconWPA.
  9. Ianchovichina, Elena & Robert McDougall, 2000. "Theoretical Structure of Dynamic GTAP," GTAP Technical Papers 480, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  10. Rod Tyers & Yongxiang Bu & Ian Bain, 2006. "China’s Equilibrium Real Exchange Rate: A Counterfactual Analysis," ANU Working Papers in Economics and Econometrics 2006-466, Australian National University, College of Business and Economics, School of Economics.
  11. Liu, Jing & Nico van Leeuwen & Tri Thanh Vo & Rod Tyers & Thomas W. Hertel, 1998. "Disaggregating Labor Payments by Skill Level in GTAP," GTAP Technical Papers 314, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
  12. Imed Drine & Christophe Rault, 2005. "Can the Balassa-Samuelson theory explain long-run real exchange rate movements in OECD countries?," Applied Financial Economics, Taylor & Francis Journals, vol. 15(8), pages 519-530.
  13. Rees, Lucy & Tyers, Rod, 2004. "Trade reform in the short run: China's WTO accession," Journal of Asian Economics, Elsevier, vol. 15(1), pages 1-31, February.
  14. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584.
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