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China's New Exchange Rate Policy: Will China Follow Japan into a Liquidity Trap?

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  • McKinnon Ronald I

Abstract

On July 21, 2005, China gave in to concerted foreign pressure--some of it no doubt well meant--to give up the fixed exchange rate it had held and grown into over the course of a decade. American pressure on China today to appreciate the renminbi is eerily similar to the American pressure on Japan that began almost 30 years ago to appreciate the yen against the dollar. There are some differences, but downward pressure on interest rates from foreign exchange risk could lead China into a zero-interest liquidity trap much like the one Japan has suffered since the mid-1990s.

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  • McKinnon Ronald I, 2006. "China's New Exchange Rate Policy: Will China Follow Japan into a Liquidity Trap?," The Economists' Voice, De Gruyter, vol. 3(5), pages 1-7, April.
    • Handle: RePEc:bpj:evoice:v:3:y:2006:i:5:n:2
    DOI: 10.2202/1553-3832.1131
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    1. Rishi Goyal & Ronald McKinnon, 2003. "Japan's Negative Risk Premium in Interest Rates: The Liquidity Trap and the Fall in Bank Lending," The World Economy, Wiley Blackwell, vol. 26(3), pages 339-363, March.
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    3. Wu, Ying, 2009. "Measuring China's monetary sterilization and autonomy in the era of globalization: 1995-2005," Journal of Asian Economics, Elsevier, vol. 20(3), pages 336-347, May.
    4. repec:spo:wpmain:info:hdl:2441/5121 is not listed on IDEAS
    5. Antoine Bouveret & Sana Mestiri & Henri Sterdyniak, 2006. "The Renminbi Equilibrium Exchange Rate: an agnostic view," SciencePo Working papers Main hal-01073825, HAL.
    6. Yin-Wong Cheung & Dickson C. Tam & Matthew S. Yiu, 2008. "Does the Chinese interest rate follow the US interest rate?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(1), pages 53-67.
    7. Philip R. Lane & Sergio L. Schmukler, 2006. "The international financial integration of China and India," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    8. Niklas Potrafke, 2007. "Social Security in Germany: A Prey of Political Opportunism?," Discussion Papers of DIW Berlin 677, DIW Berlin, German Institute for Economic Research.
    9. repec:dau:papers:123456789/5487 is not listed on IDEAS
    10. Kwack, Sung Yeung & Ahn, Choong Y. & Lee, Young S. & Yang, Doo Y., 2007. "Consistent estimates of world trade elasticities and an application to the effects of Chinese Yuan (RMB) appreciation," Journal of Asian Economics, Elsevier, vol. 18(2), pages 314-330, April.
    11. Antoine Bouveret & Sana Mestiri & Henri Sterdyniak, 2006. "La valeur du yuan. Les paradoxes du taux de change d'équilibre," Revue de l'OFCE, Presses de Sciences-Po, vol. 98(3), pages 77-127.
    12. Lijian Sun & Shengxing Zhang, 2008. "External Dependent Economy and Structural Real Estate Bubbles in China," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 16(1), pages 34-50, January.
    13. Cao Emily Yixuan & Cao Yong & Prasad Rashmi & Shen Zhengping, 2011. "U.S.-China Exchange Rate Negotiation: Stakeholders' Participation and Strategy Deployment," Business and Politics, De Gruyter, vol. 13(3), pages 1-25, October.
    14. repec:hal:wpspec:info:hdl:2441/5121 is not listed on IDEAS
    15. Paul S. L. Yip & Yiu-Kuen Tse & Yingjie Dong, 2017. "The Exchange Rate System Reform in China: US Pressure, Implicit Gradual Appreciation and Explicit Exchange Rate Bands," Economic Growth Centre Working Paper Series 1710, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    16. repec:hal:spmain:info:hdl:2441/5282 is not listed on IDEAS
    17. repec:dau:papers:123456789/5512 is not listed on IDEAS
    18. Cappiello, Lorenzo & Mehl, Arnaud, 2007. "Uncovered interest parity at distant horizons: evidence on emerging economies & nonlinearities," Working Paper Series 801, European Central Bank.
    19. repec:spo:wpecon:info:hdl:2441/5121 is not listed on IDEAS
    20. Paul S. L. Yip, 2016. "China’S Exchange Rate System Reform: Two Potential Mistakes And The Recommended Long-Term System," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 61(02), pages 1-40, June.

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