Exchange Rate Regime, Financial Market Bubbles and Long-Term Growth in China: Lessons from Japan

Gunther Schnabl

No 5902, CESifo Working Paper Series from CESifo

Abstract: The paper argues that persistent current account surpluses and increasing foreign currency-denominated asset positions constitute long-term appreciation expectations on yuan and yen, which have made China and Japan vulnerable to U.S. interest rate cuts and appreciation expectation shocks. For both China and Japan – at different points of time – self-fulfilling runs into yuan and yen have triggered monetary policy expansions, which are identified as the breeding ground for overinvestment, speculative bubbles and post-bubble secular stagnation. To prevent a similar scenario for China capital controls, a tighter monetary policy and a fixed exchange rate regime are recommended.

Keywords: China; Japan; exchange rate policy; bubble economy; overinvestment; Hayek low interest rate policy; secular stagnation; capital controls; rebalancing (search for similar items in EconPapers)
JEL-codes: E32 E42 E58 (search for similar items in EconPapers)
Date: 2016
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Related works:
Journal Article: Exchange Rate Regime, Financial Market Bubbles and Long-term Growth in China: Lessons from Japan (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5902

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