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on Transition Economics |
| By: | Li-Gang Liu |
| Abstract: | This paper argues that the triangular trade established among China, the US, and the rest of the East Asia suggests that a unilateral renminbi revaluation will not help reduce the large US-China trade deficit. The paper shows further that China's economic overheating over the last two years had little to do with its "undervalued" currency. In fact, incentives to expand balance sheets, interest rate margin and liberalization, and continued interferences on bank lending by local governments contributed to rapid credit expansion and overinvestment. In light of the unsustainable US current account deficit, China and the rest of the East Asia is likely to experience continued and large capital inflows, which will make further sterilization less effective. China's exit from the current exchange rate regime could thus be coordinated with the currencies of the East Asia region as they together would have to make major adjustments. |
| Date: | 2005–03 |
| URL: | http://d.repec.org/n?u=RePEc:eti:dpaper:05010&r=tra |
| By: | Jerome Creel (Observatoire Français des Conjonctures Économiques); Sandrine Levasseur (Observatoire Français des Conjonctures Économiques) |
| Abstract: | We use a structural VAR model with short-term restrictions to investigate the relative importance of interest rate, exchange rate and credit channels in the monetary policy transmission (MPT) for the Czech Republic, Hungary and Poland over 1993:1-2004:3. Main results are as follows. First, in the three countries, following a positive shock on the interest rate, prices increase instead of decreasing, due to the immediate depreciation of the nominal exchange rate. The results thus exhibit an "exchange rate" puzzle conducing to the appearance of a "price-puzzle". Second, none channel is very powerful for the MPT in the three countries. Nevertheless, the exchange rate and the interest rate channels play a growing role over the recent period in Poland, compared with the same channels in the Czech Republic and Hungary. As nominal exchange rate fluctuations allow for greater real shocks dampening in Poland, the cost of entering EMU may be more costly for this country than for the Czech Republic or Hungary. |
| Keywords: | monetary policy transmission, VAR models, exchange rate regimes |
| JEL: | E52 E58 F47 |
| Date: | 2005 |
| URL: | http://d.repec.org/n?u=RePEc:fce:doctra:0502&r=tra |