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Exchange Rate Regime, Financial Market Bubbles and Long-Term Growth in China: Lessons from Japan

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  • Gunther Schnabl

Abstract

The paper argues that persistent current account surpluses and increasing foreign currency-denominated asset positions constitute long-term appreciation expectations on yuan and yen, which have made China and Japan vulnerable to U.S. interest rate cuts and appreciation expectation shocks. For both China and Japan – at different points of time – self-fulfilling runs into yuan and yen have triggered monetary policy expansions, which are identified as the breeding ground for overinvestment, speculative bubbles and post-bubble secular stagnation. To prevent a similar scenario for China capital controls, a tighter monetary policy and a fixed exchange rate regime are recommended.

Suggested Citation

  • Gunther Schnabl, 2016. "Exchange Rate Regime, Financial Market Bubbles and Long-Term Growth in China: Lessons from Japan," CESifo Working Paper Series 5902, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5902
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    References listed on IDEAS

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    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Guest Contribution: “China Should Rebalance by Following the Fed”
      by Menzie Chinn in Econbrowser on 2016-06-07 21:50:34

    More about this item

    Keywords

    China; Japan; exchange rate policy; bubble economy; overinvestment; Hayek low interest rate policy; secular stagnation; capital controls; rebalancing;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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