IDEAS home Printed from https://ideas.repec.org/a/wsi/serxxx/v55y2010i02ns0217590810003705.html
   My bibliography  Save this article

The Global Credit Crisis And China'S Exchange Rate

Author

Listed:
  • RONALD MCKINNON

    (Economics Department, Stanford University, Stanford, California 94305-6072, USA)

  • BRIAN LEE

    (Economics Department, Stanford University, Stanford, California 94305-6072, USA)

  • YI DAVID WANG

    (Economics Department, Stanford University, Stanford, California 94305-6072, USA)

Abstract

The case for stabilizing China's exchange rate against the dollar is strong. Before 2005 when the yuan/dollar rate was credibly fixed, it helped anchor China's domestic price level. But gradual RMB appreciation from July 2005 to July 2008 created a "one-way-bet" that disordered China's financial markets in two respects: (i) no private capital outflows to finance China's huge trade surplus leading to an undue build up of official exchange reserves and erosion of monetary control, and (ii) a breakdown of the forward exchange market in 2007–2008 so that exporters could no longer get trade credit — probably worsening the severe slump in Chinese exports. But after July 2008, the credit crunch induced an unexpected unwinding of the dollar carry trade leading to a sharp appreciation in the dollar's effective exchange rate. The People's Bank of China (PBC) then stopped RMB appreciation against the dollar. China's forward exchange market was restored and monetary control regained. Now the PBC can better support the fiscal stimulus by promoting a parallel expansion of bank credit.But, since March 2009, the fall in the dollar (with the RMB tied to it) again threatens to undermine the yuan/dollar rate and China's monetary stability.

Suggested Citation

  • Ronald Mckinnon & Brian Lee & Yi David Wang, 2010. "The Global Credit Crisis And China'S Exchange Rate," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(02), pages 253-272.
    • Handle: RePEc:wsi:serxxx:v:55:y:2010:i:02:n:s0217590810003705
    DOI: 10.1142/S0217590810003705
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0217590810003705
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0217590810003705?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. John B. Taylor, 2009. "Getting Off Track - How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis," Books, Hoover Institution, Stanford University, number 3, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Caner Bakir, 2017. "How can interactions among interdependent structures, institutions, and agents inform financial stability? What we have still to learn from global financial crisis," Policy Sciences, Springer;Society of Policy Sciences, vol. 50(2), pages 217-239, June.
    2. Piotr Ciżkowicz & Andrzej Rzońca & Andrzej Torój, 2019. "In Search of an Appropriate Lower Bound. The Zero Lower Bound vs. the Positive Lower Bound under Discretion and Commitment," German Economic Review, Verein für Socialpolitik, vol. 20(4), pages 1028-1053, November.
    3. Hoffmann, Andreas & Schnabl, Gunther, 2016. "Monetary policies of industrial countries, emerging market credit cycles and feedback effects," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 855-873.
    4. Singh, Ajay Pratap & Nikolaou, Michael, 2014. "Optimal rules for central bank interest rates subject to zero lower bound," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 8, pages 1-67.
    5. Cukierman, Alex, 2011. "Reflections on the crisis and on its lessons for regulatory reform and for central bank policies," Journal of Financial Stability, Elsevier, vol. 7(1), pages 26-37, January.
    6. Fillieule Renaud, 2013. "The Explanation of the Subprime Crisis According to the Austrian School: A Defense and Illustration," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 19(1), pages 101-136, June.
    7. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, December.
    8. John B. Taylor, 2014. "Causes of the Financial Crisis and the Slow Recovery: A Ten-Year Perspective," Book Chapters, in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 3, Hoover Institution, Stanford University.
    9. Alan S. Blinder, 2014. "Federal Reserve Policy Before, During, and After the Fall," Book Chapters, in: Martin Neil Baily & John B. Taylor (ed.), Across the Great Divide: New Perspectives on the Financial Crisis, chapter 5, Hoover Institution, Stanford University.
    10. James Lothian, 2011. "Why Money Matters: A Fourth Natural Experiment," Open Economies Review, Springer, vol. 22(2), pages 179-187, April.
    11. Gerard H. Kuper, 2018. "The powers that are: central bank independence in the Greenspan era," Empirical Economics, Springer, vol. 54(2), pages 485-499, March.
    12. Ayoki, Milton, 2010. "Response of the Financial Markets to the European Central Bank’s Policy Announcements during the Subprime and Global Financial Crisis," MPRA Paper 78846, University Library of Munich, Germany.
    13. Eric Olson & Andrew T. Young, 2015. "Discretionary monetary policy, quantitative easing and the decline in US labor share," Economics and Business Letters, Oviedo University Press, vol. 4(2), pages 63-78.
    14. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
    15. Bernd Hayo & Pierre-Guillaume Méon, 2013. "Behind closed doors: Revealing the ECB’s decision rule," Post-Print CEB, ULB -- Universite Libre de Bruxelles, vol. 37, pages 135-160, October.
    16. Michael T. Belongia & Peter N. Ireland, 2016. "Money and Output: Friedman and Schwartz Revisited," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1223-1266, September.
    17. Tomas Adam & Oxana Babecka Kucharcukova & Jan Babecky & Vojtech Belling & Sona Benecka & Jan Bruha & Kamil Galuscak & Tomas Holub & Eva Hromadkova & Lubos Komarek & Zlatuse Komarkova & Kamila Kulhava , 2015. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2015," Occasional Publications - Edited Volumes, Czech National Bank, number as15 edited by Kamila Kulhava & Lucie Matejkova, January.
    18. Pierre L. Siklos, 2011. "Transparency is Not Enough: Central Bank Governance as the Next Frontier," Chapters, in: Sylvester Eijffinger & Donato Masciandaro (ed.), Handbook of Central Banking, Financial Regulation and Supervision, chapter 5, Edward Elgar Publishing.
    19. Charles W. Calomiris & Urooj Khan, 2015. "An Assessment of TARP Assistance to Financial Institutions," Journal of Economic Perspectives, American Economic Association, vol. 29(2), pages 53-80, Spring.
    20. Werner De Bondt, 2010. "The crisis of 2008 and financial reform," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 2(3), pages 137-156, October.

    More about this item

    Keywords

    China's exchange rate; capital flows; trade credit; forward exchange market; carry trade; bank credit; fiscal stimulus; E62; F31; F32; F42;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:serxxx:v:55:y:2010:i:02:n:s0217590810003705. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/ser/ser.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.