China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience

Ronald McKinnon

No 06-035, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: For creditor countries on the periphery of the dollar standard such as China with current account surpluses, foreign mercantile pressure to appreciate their currencies and become more flexible is misplaced. Just the expectation of variable exchange appreciation seriously disrupts the natural tendency for wage growth to balance productivity growth and thus worsens the (incipient) deflation that China now faces. It could create a zero-interest liquidity trap in financial markets that leaves the central bank helpless to combat future deflation arising out of actual currency appreciation, as with the earlier experience of Japan. Exchange rate appreciation, or the threat of it, causes macroeconomic distress without having any predictable effect on the trade surpluses of creditor economies.

Keywords: exchange rate; current account; China; Japan (search for similar items in EconPapers)
JEL-codes: F31 F33 F42 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-cna, nep-dev, nep-ifn and nep-sea
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Citations: View citations in EconPapers (11)

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Related works:
Journal Article: CHINA'S EXCHANGE RATE APPRECIATION IN THE LIGHT OF THE EARLIER JAPANESE EXPERIENCE (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:4619

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