Exchange Rate Regime, Financial Market Bubbles and Long-Term Growth in China: Lessons from Japan

35 Pages Posted: 17 Jun 2016

See all articles by Gunther Schnabl

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Multiple version iconThere are 2 versions of this paper

Date Written: May 19, 2016

Abstract

The paper argues that persistent current account surpluses and increasing foreign currency-denominated asset positions constitute long-term appreciation expectations on yuan and yen, which have made China and Japan vulnerable to U.S. interest rate cuts and appreciation expectation shocks. For both China and Japan – at different points of time – self-fulfilling runs into yuan and yen have triggered monetary policy expansions, which are identified as the breeding ground for overinvestment, speculative bubbles and post-bubble secular stagnation. To prevent a similar scenario for China capital controls, a tighter monetary policy and a fixed exchange rate regime are recommended.

Keywords: China, Japan, exchange rate policy, bubble economy, overinvestment, Hayek low interest rate policy, secular stagnation, capital controls, rebalancing

JEL Classification: E320, E420, E580

Suggested Citation

Schnabl, Gunther, Exchange Rate Regime, Financial Market Bubbles and Long-Term Growth in China: Lessons from Japan (May 19, 2016). CESifo Working Paper Series No. 5902. Available at SSRN: https://ssrn.com/abstract=2795950

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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