China's New Exchange Rate Policy: Will China Follow Japan into a Liquidity Trap?

Ronald McKinnon

The Economists' Voice, 2006, vol. 3, issue 5, 7

Abstract: On July 21, 2005, China gave in to concerted foreign pressure--some of it no doubt well meant--to give up the fixed exchange rate it had held and grown into over the course of a decade. American pressure on China today to appreciate the renminbi is eerily similar to the American pressure on Japan that began almost 30 years ago to appreciate the yen against the dollar. There are some differences, but downward pressure on interest rates from foreign exchange risk could lead China into a zero-interest liquidity trap much like the one Japan has suffered since the mid-1990s.

Date: 2006
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DOI: 10.2202/1553-3832.1131

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