Does an Undervalued Currency Promote Growth? Evidence from China
Whether currency devaluation promotes growth is an empirically open question. Coexistence of an undervalued currency and the worldï¿½s largest trade surplus alongside a booming economy makes China a unique case study. Using the bounds-testing approach to cointegration and error correction modeling proposed by Pesaran et al. (2001), we estimate a reduced form model for China. The findings suggest that devaluation of the Yuan is contractionary in the short run but expansionary in the long run.
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