Structural Change and the Dynamics of China-US Real Exchange Rate

Xiaodong Zhu, Juanyi Xu and Yong Wang
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Juanyi Xu: Hong Kong Univ of Science and Technology

No 1010, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We study the dynamics of the real exchange rate between China and the US since 1990. We first show that a standard Balassa-Samuelson model without structural change cannot account for the observed real exchange rate behaviour. We then extend the Balassa-Samuelson framework to a three-sector model with structural change and frictions in both capital and labour markets. We show that the model can quantitatively account for both the structural changes in the two countries and the behaviour of the real exchange rate between the two countries. Finally, we find that factor market frictions are crucial for understanding the structural changes and real exchange rate dynamics.

Date: 2016
New Economics Papers: this item is included in nep-opm and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1010

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