Are Currency Appreciations Contractionary in China?

The Chinese economy has experienced a state of external and internal fluctuations for a few years, which has something related to the undervaluation of renminbi (RMB). However the Chinese Government hesitates to permit RMB to appreciate due to the fear that RMB appreciations are contractionary hence have unfavorable affect on China’s economic growth and employment. The objective of this report is to empirically measure the effects of RMB real exchange rate on China’s output….

The econometric outcomes of the report reveal that (1) despite source of spurious correlation is controlled for, RMB appreciation has resulted in a drop in China’s productivity, indicating that RMB appreciations are contractionary, and that (2) once the international finance linkage of Chinese economy is taken into account, the effect of RMB real exchange rate shocks on China’s output and the power of the shocks in detailing the change of China’s output are reduced. The report gives a few possible explanations to those conclusions, and highlights that the discoveries do not necessarily mean that China should continue keeping the undervaluation of RMB…

Are Currency Appreciations Contractionary in China Downloads

Source: National Bureau of Economic Research

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