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Structural Change and the Dynamics of China-US Real Exchange Rate

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  • Xiaodong Zhu

    (University of Toronto)

  • Juanyi Xu

    (Hong Kong Univ of Science and Technology)

  • Yong Wang

    (Hong Kong University of Science and Tech)

Abstract

We study the dynamics of the real exchange rate between China and the US since 1990. We first show that a standard Balassa-Samuelson model without structural change cannot account for the observed real exchange rate behaviour. We then extend the Balassa-Samuelson framework to a three-sector model with structural change and frictions in both capital and labour markets. We show that the model can quantitatively account for both the structural changes in the two countries and the behaviour of the real exchange rate between the two countries. Finally, we find that factor market frictions are crucial for understanding the structural changes and real exchange rate dynamics.

Suggested Citation

  • Xiaodong Zhu & Juanyi Xu & Yong Wang, 2016. "Structural Change and the Dynamics of China-US Real Exchange Rate," 2016 Meeting Papers 1010, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1010
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    References listed on IDEAS

    as
    1. Robert Inklaar & Marcel P. Timmer, 2014. "The Relative Price of Services," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 727-746, December.
    2. Loren Brandt & Xiaodong Zhu, 2010. "Accounting for China's Growth," Working Papers tecipa-394, University of Toronto, Department of Economics.
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    Cited by:

    1. Bordo, Michael D. & Choudhri, Ehsan U. & Fazio, Giorgio & MacDonald, Ronald, 2017. "The real exchange rate in the long run: Balassa-Samuelson effects reconsidered," Journal of International Money and Finance, Elsevier, vol. 75(C), pages 69-92.

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