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China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience

  • McKinnon, Ronald

For creditor countries on the periphery of the dollar standard such as China with current account surpluses, foreign mercantile pressure to appreciate their currencies and become more flexible is misplaced. Just the expectation of variable exchange appreciation seriously disrupts the natural tendency for wage growth to balance productivity growth and thus worsens the (incipient) deflation that China now faces. It could create a zero-interest liquidity trap in financial markets that leaves the central bank helpless to combat future deflation arising out of actual currency appreciation, as with the earlier experience of Japan. Exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable effect on the trade surpluses of creditor economies.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-35.

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Date of creation: 2006
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Handle: RePEc:zbw:zewdip:4619
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  1. Zhang, Xiaobo & Tan, Kong-Yam, 2004. "Blunt to sharpened razor," DSGD discussion papers 13, International Food Policy Research Institute (IFPRI).
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