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China’s Exchange Rate and International Adjustment in Wages, Prices, and Interest Rates: Japan Déjà Vu?

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  • Ronald Ian McKinnon
  • Gunther Schnabl

Abstract

China keeps its exchange rate tightly fixed to the dollar. Its productivity growth and trade surplus have been high, and it continues to accumulate large dollar reserves. Many observers take this as evidence that the renminbi is undervalued and should be appreciated to reduce the Chinese trade surplus. We argue that an appreciation of the renminbi need not reduce China’s trade surplus but could cause serious deflation in China. To show this, we consider international adjustment between China and the United States from both an asset-market and a labor-market perspective, and compare this to Japan’s unsuccessful appreciation of the yen.

Suggested Citation

  • Ronald Ian McKinnon & Gunther Schnabl, 2006. "China’s Exchange Rate and International Adjustment in Wages, Prices, and Interest Rates: Japan Déjà Vu?," CESifo Working Paper Series 1720, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1720
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1720.pdf
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    References listed on IDEAS

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    1. Jeffrey Frankel, 2006. "On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," CESifo Economic Studies, CESifo, vol. 52(2), pages 246-275, June.
    2. Gunther Schnabl & Christian Danne, 2005. "The Changing Role of the Yen/Dollar Exchange Rate for Japanese Monetary Policy," International Finance 0503001, EconWPA.
    3. Ronald McKinnon & Gunther Schnabl, 2004. "The East Asian Dollar Standard, Fear of Floating, and Original Sin," Review of Development Economics, Wiley Blackwell, vol. 8(3), pages 331-360, August.
    4. Schnabl, Gunther & Baur, Dirk, 2002. "Purchasing power parity: Granger causality tests for the yen-dollar exchange rate," Japan and the World Economy, Elsevier, vol. 14(4), pages 425-444, December.
    5. McKinnon, Ronald & Schnabl, Gunther, 2006. "Devaluing the dollar: A critical analysis of William Cline's case for a New Plaza Agreement," Journal of Policy Modeling, Elsevier, vol. 28(6), pages 683-694, September.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. repec:bla:chinae:v:25:y:2017:i:1:p:32-57 is not listed on IDEAS
    2. repec:wsi:serxxx:v:52:y:2007:i:03:n:s0217590807002749 is not listed on IDEAS
    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. Rahman, Mizanur, 2008. "The Impact of a Common Currency on East Asian Production Networks and China’s Exports Behavior," MPRA Paper 13931, University Library of Munich, Germany.
    5. Aliyu, Shehu Usman Rano, 2009. "Impact of Oil Price Shock and Exchange Rate Volatility on Economic Growth in Nigeria: An Empirical Investigation," MPRA Paper 16319, University Library of Munich, Germany, revised 10 Jun 2009.
    6. Gunther Schnabl, 2017. "Exchange Rate Regime, Financial Market Bubbles and Long-term Growth in China: Lessons from Japan," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 25(1), pages 32-57, January.
    7. Risheng Mao & John Whalley, 2011. "Ownership Characteristics, Real Exchange Rate Movements and Labor Market Adjustment in China," NBER Working Papers 17565, National Bureau of Economic Research, Inc.
    8. DANNE, Christian & SCHNABL, Gunther, 2008. "A role model for China? Exchange rate flexibility and monetary policy in Japan," China Economic Review, Elsevier, vol. 19(2), pages 183-196, June.
    9. Douglas L. Campbell, 2013. "Relative Prices, Hysteresis, and the Decline of American Manufacturing," 2013 Papers pca584, Job Market Papers.
    10. Schnabl, Gunther, 2008. "Exchange rate volatility and growth in small open economies at the EMU periphery," Economic Systems, Elsevier, vol. 32(1), pages 70-91, March.
    11. Ziegler, Christina, 2012. "Monetary policy under alternative exchange rate regimes in Central and Eastern Europe," Working Papers 104, University of Leipzig, Faculty of Economics and Management Science.
    12. Andrea Fracasso, 2015. "Economic Rebalancing and Growth: the Japanese experience and China’s prospects," DEM Discussion Papers 2015/07, Department of Economics and Management.

    More about this item

    Keywords

    China; exchange rate; adjustment; assets markets; labour markets;

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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