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Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth

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  • Bonatti, Luigi
  • Fracasso, Andrea

Abstract

There is a widespread consensus that China’s growth paradigm needs a rebalancing away from investment and external demand and towards consumption and domestic demand. This rebalancing process is supposed to be accompanied by the transition towards Renminbi’s full convertibility. In contrast, it is controversial to what extent this adjustment will accelerate the slowdown of China’s growth, which will likely occur because of other structural factors. We address these issues by means of a two-country two-stage (before and after Renminbi’s full convertibility) model, which reproduces some qualitative features of China’s growth pattern and its relationship with the US. We analyze to what extent altering the Chinese exchange rate policy, as well as other structural and policy variables, may have (short-, medium- and long-term) effects on the evolution of the Chinese economy. The paper shows that by lifting the controls on the capital account and letting the currency float, the Chinese authorities will not only expose the economy to the risks of free capital mobility, but will also renounce to important policy instruments for controlling the dynamics of China’s economy and the allocation of the national resources.

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  • Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:54129
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    Cited by:

    1. 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

    Growth rebalancing; global imbalances; currency convertibility; Chinese economy;

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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