Foreign Currency Inflow and Real Exchange Rate Movement

Yuanyan Zhang

Chinese Economy, 2009, vol. 42, issue 2, 63-90

Abstract: A number of East Asian and oil-exporting countries have generated a large inflow of foreign currencies as a result of their continued trade surplus and surging foreign investments in recent decades. In China, the booming foreign inflow was accompanied by a modest appreciation of the real exchange rate. This paper argues that the failure of the real exchange rate to appreciate in China is more the result of a higher demand for real monetary balances than of exchange rate manipulation. Such "sterilization by the people" is more evident in earlier episodes than in more recent ones. This can be due to the emergence of competitive financial instruments, a deeper financial market, and a more developed social security system.

Date: 2009
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