| By: |
Roland Straub (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.);
Christian Thimann (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.) |
| Abstract: |
This paper sheds new light on the external and domestic dimension of China’s
exchange rate policy. It presents an open economy model to analyse both
dimensions of macroeconomic adjustment in China under both flexible and fixed
exchange rate regimes. The model-based results indicate that persistent
current account surpluses in China cannot be rationalized, under general
circumstances, by the occurrence of permanent technology or labour supply
shocks. As a result, the understanding of the macroeconomic adjustment process
in China requires to mimic the effects of potential inefficiencies, which
induce the subdued response of domestic absorption to permanent income shocks
causing thereby the observed positive unconditional correlation of trade
balance and output. The paper argues that these inefficiencies can be
potentially seen as a by-product of the fixed exchange rate regime, and can be
approximated by a stochastic tax on domestic consumption or time varying
transaction cost technology related to money holdings. Our results indicate
that a fixed exchange regime with financial market distortions, as defined
above, might induce negative effects on GDP growth in the medium-term compared
to a more flexible exchange rate regime. JEL Classification: E32, E62. |
| Keywords: |
DSGE modelling, China, current account. |
| Date: |
2009–03 |
| URL: |
http://d.repec.org/n?u=RePEc:ecb:ecbwps:20091040&r=cna |