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China and its Dollar Exchange Rate: A Worldwide Stabilizing Influence?Ronald McKinnonStanford University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Gunther SchnablUniversity of Leipzig - Institute for Economic Policy; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) May 17, 2011 CESifo Working Paper Series No. 3449 Abstract: We argue that criticism concerning the Chinese dollar peg is misplaced as no predictable link exists between the exchange rate and the trade balance of an international creditor economy. The stable nominal yuan/dollar rate is argued to have stabilized Chinese, East Asian and global growth. However, linked to US low interest rates, Chinese sterilization policies and potentially subsidized capital allocation in China the real yuan/dollar rate is undervalued. This has caused - both in China and the United States - structural distortions and threatens to undermine global growth and stability. We propose Sino-American policy coordination to escape from the policy dilemma, which continues to drive global imbalances.
Number of Pages in PDF File: 29 Keywords: China, exchange rate, financial stability, economic stability, international policy coordination, currency war JEL Classification: F150, F310, F330 working papers seriesDate posted: May 17, 2011Suggested CitationContact Information
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