Are Currency Appreciations Contractionary in China?
The Chinese economy has been in a state of external and internal imbalances for some years, which has something to do with the undervaluation of renminbi (RMB). But the Chinese Government hesitates to allow RMB to appreciate because of the worry that RMB appreciations are contractionary thus have negative impact on China's economic growth and employment. The purpose of this paper is to empirically assess the effects of RMB real exchange rate on China's output. The econometric results of the paper show that (1) even after source of spurious correlation is controlled for, RMB appreciation has led to a decline in China's output, suggesting that RMB appreciations are contractionary, and that (2) once the international finance linkage of Chinese economy is accounted for, the effect of RMB real exchange rate shocks on China's output and the power of the shocks in explaining the change of China's output are diminished. The paper gives some possible explanations to those findings, and points out that the findings do not necessarily imply that China should continue maintaining the undervaluation of RMB.
This is a revision of a paper presented at the 17th Annual East Asian Seminar on Economics on "International Financial Issues around the Pacific-Rim", Hawaii, June 22-24, 2006, organized by the National Bureau of Economic Research. I thank Ashvin Ahuja, Dante Canlas, Michael Dooley, Peter Garber, Takatoshi Ito, and Andrew Rose for insightful comments, and Guoqing Song for help in obtaining data used in this research. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Jianhuai, Shi. "Are Currency Appreciations Contractionary in China?" Jingji Yanjiu/Economic Research Journal 42, 1 (January 2007): 41-55.
Are Currency Appreciations Contractionary in China?, Jianhuai Shi. in International Financial Issues in the Pacific Rim: Global Imbalances, Financial Liberalization, and Exchange Rate Policy, Ito and Rose. 2008