Nominal and Real Exchange Rate Change by China: Global Impacts on Agricultural Prices

Stephen MacDonald and Ralph Seeley

No 9692, 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: China's exchange rate policy has become an important factor in world agricultural trade. The renminbi, while no longer fixed in U.S. dollar terms, is subject to significant intervention, and is widely regarded as undervalued. In the long run, an undervalued exchange rate is self-correcting, as increases in the money supply raise inflation, revaluing the currency in real terms. Adjusting a real exchange rate through inflation has different consequences for China's economy compared with an adjustment in the nominal exchange rate. The consequences for world agricultural production and trade are also different. To capture these differences, a static, partial equilibrium model was extended to include macro-economic effects. Parameter values for the model were derived from USDA's Country Linker System (CLS) for 39 regions and 24 agricultural commodities, and from the literature on exchange rate pass-through to inflation and output. The results illustrate how standard partial equilibrium analysis overstates the impact of China's nominal exchange rate adjustment by overlooking the impacts on inflation.

Keywords: Demand and Price Analysis; International Relations/Trade (search for similar items in EconPapers)
Pages: 21
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea07:9692

DOI: 10.22004/ag.econ.9692

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