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ID: 117921

In search of an optimal strategy for yuan’s real revaluation / Dai, Meixing

Dai, Meixing	Journal Article
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2013.

Summary/Abstract

International commentators seem to have a consensus view that the Chinese yuan is substantially undervalued and the Chinese monetary authority must take speedy actions to redress the currency misalignment by rapid nominal revaluation. This paper argues for a gradualist but comprehensive strategy for adjusting the renminbi's exchange rate. Taking into consideration the facts that the yuan's undervaluation is caused by an array of domestic and international factors and that the Chinese central bank cannot effectively invest its growing holdings of foreign reserves, we develop a framework to provide a theoretical underpinning for the optimal strategy for the renminbi's gradual revaluation. With this strategy, the renminbi undervaluation problem is gradually redressed through a combination of nominal appreciation and higher inflation plus some other structural and macroeconomic policies. This strategy can also allow absorption of external imbalances, hence strengthening the foundation of China's long-term growth.

Key Words

Macroeconomic Adjustment ; Foreign Reserves ; Yuan ; Real Revaluation ; Renminbi (RMB) ; External Imbalances

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ID: 143430

Policy transmissions, external imbalances, and their impacts: Cross-country evidence from BRICS / Yuan, Chunming; Chen, Ruo

YUAN, Chunming	Article
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Summary/Abstract

This paper provides an empirical exploration of the interaction between fiscal policy, monetary policy, exchange rates, and external balances as well as their impacts on real economic growth and inflation for the BRICS countries. A panel VAR model is employed to assess the dynamic relationships. Our results generally confirm the significant impacts of a monetary shock on real economic activity but the effect of fiscal policy appears to be much weaker from the cross-country perspective. We do not find evidence supporting the “twin deficits” hypothesis but the positive interaction between inflation and interest rates – the “price puzzle” – is documented. When bilateral exchange rates and trade deficits (vis-à-vis the US) are used, we find that the BRICS–US bilateral trade balances do not react considerably to currency depreciation shocks, indicating that exchange rates may not play a critical role in the adjustment of large trade deficits for the U.S.

Key Words

Fiscal Policy ; Monetary Policy ; Panel VAR ; External Imbalances ; BRICS

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