Can a Rapidly-growing Export-oriented Economy Smoothly Exit an Exchange Rate Peg?: Lessons for China from Japan's High-growth Era, Issue 11625
National Bureau of Economic Research, 2005 - Currency question - 54 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 cent China today Chinese Corporate Bond cost of capital current account data appendix domestic effective exchange rate effective rate equation exit export prices Figure financial institutions Fiscal flexibility floating foreign currency foreign exchange market forward exchange forward market global high-growth impact imports industries interest rates International Financial Statistics Japanese economy Japanese exports 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 NBER Working Paper nominal effective exchange nominal exchange rate Number Odaka open positions passthrough coefficient period rate of 360 real effective exchange real exchange rate reer relative revaluation significant significantly Smithsonian Agreement subscription Suda Table Tokyo Toyo Keizai Trade transactions U.S. dollar undervalued unit root user cost variables wholesale price index window guidance