Can a rapidly-growing export-oriented economy smoothly exit an exchange rate peg?: lessons for China from Japan's high-growth era
National Bureau of Economic Research, 2005 - Business & Economics - 55 pages
"We explore the parallels between Japanese currency policy after World War II and Chinese currency policy today. After two decades of pegging at 360 yen, Japan decoupled from the dollar on August 1971 and then repegged at a revalued rate of 308 yen. After stabilizing the exchange rate at this new level for about a year, greater flexibility was introduced. This phased adjustment - revaluation followed after a time by an increase in flexibility - bears more than a passing resemblance to recent Chinese policy initiatives. We analyze the impact of Japan's exit from its peg on exports and investment. The results point to sizeable effects of the yen's revaluation on both variables, especially investment. While our analysis suggests that a rapidly-growing, export-oriented economy can operate a heavily managed float despite the presence of capital controls and the absence of sophisticated foreign currency forward markets, it underscores the importance of managing the exchange rate with domestic conditions in mind and avoiding the kind of large real appreciation that would sharply compress profits and damage investment. For China this suggests starting with a modest band widening and a limited increase in flexibility, and not with a large step revaluation which could have a sharp negative impact on investment and growth. Our results thus provide support for the kind of measures taken at the end of July"--National Bureau of Economic Research web site.
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authorities Balance of Payments Bank of Japan Big Four banks BOJ lending Bretton Woods System capital controls China today Chinese cost of capital current account data appendix discount rate domestic effective exchange rate effective rate equation exchange controls exit export prices Figure financial institutions flexibility floating foreign exchange market foreign reserves forward exchange forward market high growth impact imports industries input price interest rates International Financial Statistics Japan since 1868 Japanese economy Japanese exports kind of large Komiya and Suda Kosai large real appreciation loans long-run passthrough Long-Term Economic Statistics manufacturing Ministry of Finance Miyagawa and Tokui monetary policy Nakamura nominal effective exchange nominal exchange rate Odaka open market operations open positions passthrough coefficient period rate of 360 real effective exchange real exchange rate reer relative restrictions revaluation sector significantly Smithsonian Agreement Table Toyo Keizai Trade transactions U.S. dollar undervalued unit root user cost variables window guidance