Appreciating the Renminbi

33 Pages Posted: 1 Mar 2011

See all articles by Rod Tyers

Rod Tyers

Australian National University (ANU) - School of Economics; The University of Western Australia - Department of Economics

Ying Catherine Zhang

The University of Western Australia - UWA Business School

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Abstract

International pressure to revalue Chinas currency stems in part from the expectation that rapid economic growth should be associated with an underlying real exchange rate appreciation. This hinges on the Balassa-Samuelson hypothesis, which sees growth as stemming from improvements in traded sector productivity and associated rises in wages and non-traded prices. Yet, despite extraordinary growth after the mid-1990s Chinas real exchange rate showed no tendency to appreciate until after 2004. We use a dynamic general equilibrium model to simulate the economy and show that, during this period, trade reforms and a rising national saving rate were offsetting forces in the presence of elastic labour supply. We then examine the possible determinants of the striking transition to real appreciation thereafter, noting mounting evidence that an improved rural term of trade has tightened Chinas labour market. We show that should the Chinese government bow to international pressure by appreciating the renminbi either via an extraordinary monetary contraction or via export disincentives, the consequences would be harmful for both Chinese and global interests.

Suggested Citation

Tyers, Rod and Zhang, Ying Catherine, Appreciating the Renminbi. The World Economy, Vol. 34, No. 2, pp. 265-297, 2011. Available at SSRN: https://ssrn.com/abstract=1773223 or http://dx.doi.org/10.1111/j.1467-9701.2010.01319.x

Rod Tyers (Contact Author)

Australian National University (ANU) - School of Economics ( email )

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The University of Western Australia - Department of Economics ( email )

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HOME PAGE: http://www.business.uwa.edu.au/school/staff-profiles?type=profile&dn=cn%3DRodney%20Tyers%2Cou%3DEcon

Ying Catherine Zhang

The University of Western Australia - UWA Business School ( email )

Crawley, Western Australia 6009
Australia

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