China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience

12 Pages Posted: 21 Sep 2006

See all articles by Ronald McKinnon

Ronald McKinnon

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

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Abstract

For creditor countries such as China on the periphery of the dollar standard with current account surpluses, foreign mercantile pressure to appreciate their currencies and become more flexible is misplaced. Just the expectation of variable exchange appreciation seriously disrupts the natural tendency for wage growth to balance productivity growth and thus worsens the (incipient) deflation that China now faces. It could create a zero-interest liquidity trap in financial markets that leaves the central bank helpless to combat future deflation arising out of actual currency appreciation, as with the earlier experience of Japan.

Suggested Citation

McKinnon, Ronald, China's Exchange Rate Appreciation in the Light of the Earlier Japanese Experience. Pacific Economic Review, Vol. 11, No. 3, pp. 287-298, October 2006, Available at SSRN: https://ssrn.com/abstract=931750 or http://dx.doi.org/10.1111/j.1468-0106.2006.00316.x

Ronald McKinnon (Contact Author)

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

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

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