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

18 Pages Posted: 8 Jun 2006 Last revised: 26 Aug 2008

See all articles by Ronald McKinnon

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

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Date Written: May 2006

Abstract

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.

Keywords: exchange rate, current account, China, Japan

JEL Classification: F31, F33, F42

Suggested Citation

McKinnon, Ronald, China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience (May 2006). ZEW - Centre for European Economic Research Discussion Paper No. 06-035, Available at SSRN: https://ssrn.com/abstract=906743 or http://dx.doi.org/10.2139/ssrn.906743

Ronald McKinnon (Contact Author)

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

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