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Appreciating the Renminbi

  • Rod Tyers

    ()

  • Iain Bain

    ()

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 growth stems from improvements in traded sector productivity that cause wages and non-traded prices to rise. Yet, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has as yet shown no long run tendency to appreciate. The use of a global numerical model allows extensions of the hypothesis, including failures of the law of one price for tradable goods, which point to WTO accession trade reforms and China’s high saving rate as key depreciating forces since the late 1990s. The same model is then applied to the implications of premature RMB appreciation. It is shown that, unless this is achieved in association with the repatriation of foreign reserves, which would require thus far unavailable financial depth in the Chinese economy, unilateral RMB appreciation would be destructive of both Chinese and global interests.

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Paper provided by Australian National University, College of Business and Economics, School of Economics in its series ANU Working Papers in Economics and Econometrics with number 2007-483.

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Length: 33 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:acb:cbeeco:2007-483
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  1. Holz, Carsten A., 2006. "New capital estimates for China," China Economic Review, Elsevier, vol. 17(2), pages 142-185.
  2. Joshua Aizenman & Jaewoo Lee, 2006. "Financial Versus Monetary Mercantilism-Long-run View of Large International Reserves Hoarding," NBER Working Papers 12718, National Bureau of Economic Research, Inc.
  3. 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.
  4. 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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  7. Robert W. Fogel, 2006. "Why China is Likely to Achieve its Growth Objectives," NBER Working Papers 12122, National Bureau of Economic Research, Inc.
  8. 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.
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  13. Rod Tyers & Jane Golley, 2007. "China’s Real Exchange Rate," ANU Working Papers in Economics and Econometrics 2007-479, Australian National University, College of Business and Economics, School of Economics.
  14. 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.
  15. William R. Cline, 2005. "The Case for a New Plaza Agreement," Policy Briefs PB05-04, Peterson Institute for International Economics.
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  17. Frankel, Jeffrey, 2004. "On the Renminbi: The Choice between Adjustment under a Fixed Exchange Rate and Adustment under a Flexible Rate," Working Paper Series rwp04-037, Harvard University, John F. Kennedy School of Government.
  18. 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.
  19. McKinnon, Ronald I., 2004. "The East Asian dollar standard," China Economic Review, Elsevier, vol. 15(3), pages 325-330.
  20. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  21. Robert J. Gordon, 2003. "Exploding Productivity Growth: Context, Causes, and Implications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 207-298.
  22. Rod Tyers & Jane Golley & Iain Bain, 2007. "China'S Real Exchange Rate Puzzle," CAMA Working Papers 2007-14, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  23. 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.
  24. Cai Fang & Wang Dewen, 2005. "Demographic transition: implications for growth," Labor and Demography 0512001, EconWPA.
  25. Eswar Prasad & Qing Wang & Thomas Rumbaugh, 2005. "Putting the Cart Before the Horse? Capital Account Liberalization and Exchange Rate Flexibility in China," IMF Policy Discussion Papers 05/1, International Monetary Fund.
  26. Jaewoo Lee & Joshua Aizenman, 2006. "Financial Versus Monetary Mercantilism; Long-Run View of the Large International Reserves Hoarding," IMF Working Papers 06/280, International Monetary Fund.
  27. 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.
  28. Rod Tyers & Iain Bain, 2015. "The Global Economic Implications of Freer Skilled Migration," Economics Discussion / Working Papers 15-12, The University of Western Australia, Department of Economics.
  29. 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.
  30. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  31. Tung, Chen-Yuan & Baker, Sam, 2004. "RMB revaluation will serve China's self-interest," China Economic Review, Elsevier, vol. 15(3), pages 331-335.
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