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CHINA'S REAL EXCHANGE RATE PUZZLE

Rodney Tyers, Jane Golley () and Iain Bain ()

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: International pressure to revalue China’s currency stems in part from the expectation that rapid economic growth should be associated with a real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis under which economic growth, stemming from improvements in traded sector productivity, causes non-traded prices to rise. The puzzle is that, while evidence on China’s productivity and prices supports this hypothesis, its real exchange rate has shown no long run tendency to appreciate. Resolution requires extension of the hypothesis to allow for effects on the real exchange rate due to non-traded productivity improvements or, in association with failures of the law of one price for traded goods, labour supply growth and growth-related demand switches due to changes in financial capital flows and trade distortions. The sensitivity of China’s real exchange rate to these determinants is reviewed with the results confirming that financial and capital outflows are dominant depreciating forces in the short run. Along with WTO accession trade reforms, it is shown that the heretofore rising surplus of Chinese domestic saving over its investment has restrained the real exchange rate from appreciating since the late 1990s.

JEL-codes: C68 C53 E27 F21 F43 F47 O11 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2007-06
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Related works:
Journal Article: China’s Real Exchange Rate Puzzle (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2007-14

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