China and its Dollar Exchange Rate: A Worldwide Stabilizing Influence?

29 Pages Posted: 17 May 2011  

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased); CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Date Written: May 17, 2011

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.

Keywords: China, exchange rate, financial stability, economic stability, international policy coordination, currency war

JEL Classification: F150, F310, F330

Suggested Citation

McKinnon, Ronald and Schnabl, Gunther, China and its Dollar Exchange Rate: A Worldwide Stabilizing Influence? (May 17, 2011). CESifo Working Paper Series No. 3449. Available at SSRN: https://ssrn.com/abstract=1844105

Ronald McKinnon

Stanford University, School of Humanities & Sciences, Department of Economics (Deceased)

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) (Deceased)

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

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