Exchange Rate Regime, Financial Market Bubbles and Long-Term Growth in China: Lessons from Japan
35 Pages Posted: 17 Jun 2016
Date Written: May 19, 2016
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: Suggested Citation