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Are Currency Revaluations Contractionary in China?

Author

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  • Jianhuai Shi

    (China Center for Economic Research)

Abstract

Chinese economy has been in a state of external imbalance and internal imbalance for some years, which certainly has something to do with the undervaluation of renminbi (RMB). But Chinese Government hesitates to revalue RMB because of the worry that RMB revaluations are contractionary thus have negative impact on China's economic growth and employment. The purpose of this paper is to empirically assess the effects of RMB real exchange rate on China's output. The econometric work of the paper shows that even after sources of spurious correlation and reverse causation are controlled for, RMB revaluation has led to a decline in Chinas output, suggesting that RMB revaluations do be contractionary. The paper gives some possible explanations to this finding, and points out that the finding does not consequentially imply that China should continue maintaining the undervaluation of RMB.

Suggested Citation

  • Jianhuai Shi, 2006. "Are Currency Revaluations Contractionary in China?," Macroeconomics Working Papers 22712, East Asian Bureau of Economic Research.
  • Handle: RePEc:eab:macroe:22712
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    File URL: http://www.eaber.org/node/22712
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    References listed on IDEAS

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    1. Jeffrey A. Frankel, 2005. "Contractionary Currency Crashes in Developing Countries," NBER Working Papers 11508, National Bureau of Economic Research, Inc.
    2. Alexander W. Hoffmaister & Carlos A. Végh, 1996. "Disinflation and The Recession-Now-versus-Recession-Later Hypothesis: Evidence from Uruguay," IMF Staff Papers, Palgrave Macmillan, vol. 43(2), pages 355-394, June.
    3. Van Wijnbergen, Sweder, 1986. "Exchange rate management and stabilization policies in developing countries," Journal of Development Economics, Elsevier, vol. 23(2), pages 227-247, October.
    4. Frank Dietrich & Hartmut Kliemt & Michael Imhoff, 2002. "Introduction," Homo Oeconomicus, Institute of SocioEconomics, vol. 19, pages 7-8.
    5. Kamin, Steve B. & Rogers, John H., 2000. "Output and the real exchange rate in developing countries: an application to Mexico," Journal of Development Economics, Elsevier, vol. 61(1), pages 85-109, February.
    6. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    7. Virginie Coudert & Cécile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
    8. Gylfason, Thorvaldur & Radetzki, Marian, 1991. "Does Devaluation Make Sense in the Least Developed Countries?," Economic Development and Cultural Change, University of Chicago Press, vol. 40(1), pages 1-25, October.
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    Cited by:

    1. Mezzullo, William G. & McManus, Marcelle C. & Hammond, Geoff P., 2013. "Life cycle assessment of a small-scale anaerobic digestion plant from cattle waste," Applied Energy, Elsevier, vol. 102(C), pages 657-664.

    More about this item

    Keywords

    renminbi; exchange rate misalignment; contractionary devaluation; VAR model;

    JEL classification:

    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • O24 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Trade Policy; Factor Movement; Foreign Exchange Policy
    • P21 - Economic Systems - - Socialist Systems and Transition Economies - - - Planning, Coordination, and Reform

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