In Search of an Optimal Strategy for Yuan’s Real Revaluation

Meixing Dai ()

MPRA Paper from University Library of Munich, Germany

Abstract: International commentators seem to have a consensus view that the Chinese yuan is substantially undervalued and the Chinese monetary authority must take speedy actions to redress the currency misalignment by rapid nominal revaluation. This paper argues for a gradualist but comprehensive strategy for adjusting RMB’s exchange rate. Taking into consideration of the facts that the yuan’s undervaluation is caused by an array of domestic and international factors and the Chinese central bank cannot effectively invest its growing holdings of foreign reserves, we develop a framework to provide a theoretical underpinning for the optimal strategy for renminbi’s gradual revaluation. With this strategy, the renminbi undervaluation problem is gradually redressed through a combination of nominal appreciation and higher inflation plus some other structural and macroeconomic policies. This strategy can also allow absorb external imbalances hence strengthening the foundation of China’s long-term growth.

Keywords: Real revaluation; renminbi (RMB); foreign reserves; external imbalances; macroeconomic adjustment (search for similar items in EconPapers)
JEL-codes: E52 E61 F31 F41 (search for similar items in EconPapers)
Date: 2012-09
New Economics Papers: this item is included in nep-mac, nep-mon and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:41047

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