Chinese reacting to the Exchange Rate.docx
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Chinese reacting to the Exchange Rate.docx
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ChinesereactingtotheExchangeRate
ChinesereactingtotheExchangeRate
Abstract
ThroughestimatingthedataforChineseinternationaltradeandthefactorsforChinesemonetarypolicy(Chinesemoneysupply,Chineseinflationrate,andChineseGDPpercapita),wetrytoevaluatetheinfluenceofanadjustmentintheChineseexchange-ratepolicy.OurnullhypothesisisthatthevolatilitydeedofChineserealexchangeratesandnominalexchangerateisthekeyfactor,whichsignificantlydeterminantsofChineseexports;hence,anappreciationofChineseRMBshoulddecreaseChineseexports.
1.Introduction
A.Theobjective:
ThegrowthofChineseGDPandinternationaltrade
B.WhythepolicymakersofCCPwantthelowerexchangerate
2.StatisticalModeling
A.Literaturereview:
2.11ThetradelinkagesamongUSA,EuropeanUnion,China,RussiaandJapan
2.12Chinesemonetarypolicyreview
B.Therelevant:
2.21ContributioninthemodelingChineseinternationaltradeincludingChineseexchangerates
C.Thedata
D.Thespecifictraditionalequation
E.Theresults
F.Conclusion
3.Summary
3.1Chineseexchangerateshouldbefloatinthelongrun,butnotintheshortrun
3.2Chinesemonetarypolicywillsignificantlyaffecttheinternationalmonetaryandtradecollaboration.
Inretrospect,globalhealingledtoafalsesenseofcomplacencyontwocriticalfronts:
First,itcreatedtheclimatethatculminatedintheNasdaqbubble.TheUSFederalReservewas,ineffect,easingaggressivelyatatimewhentheUSeconomywasalreadybooming.InthemidstoftheFed’semergencyeasingcampaign,America’srealGDPsurgedata5.6%annualratein4Q98.Farfromfaltering,theUSeconomywasonatear.AlthoughGreenspan&Co.begantotakebacktheirextraordinarymonetaryaccommodationbymid-1999,bythenitwastoolate--thedamagehadbeendone.Moreover,itwascompoundedbytheFed’snowinfamousY2Kliquidityinjectionoflate1999.Americawasonthebrinkofarunawayboom.AFed-induced,Nasdaq-ledliquiditybubblegaverisetothegreatIToverhangthathassincewreakedsuchhavocontheUSandthebroaderglobaleconomy.Suchwasthelegacyofglobalhealing.
Butglobalhealingdealtanothercriticalblowtotheworldeconomy.Itdampenedtheenthusiasmforreform.AsiarodethecoattailsofthesamepowerfulIT-ledUSgrowthdynamic.Indeed,weestimatethatUSITexportsaccountedforasmuchas40%ofnon-JapanAsia’soverallGDPgrowthin2000.Withgrowthlikethat,whoneedsreform?
Everythingthatwaswronghadseeminglybeenfixed--andquitequicklyatthat.AtleastthatwastheimplicitlogicthroughoutAsia,asbankingreformwasputonhold,corporaterestructuringstalled,andtheoldwaysofcrony-capitalismendured.Globalhealingwasapowerfulantidotefortheregion’sdevastatingcrisis--thecoverthatimpededlongoverdueandurgentreforms.
Thesamewasthecaseforanyrepairthatwasabouttobemadetotheworldfinancialarchitecture.Outofthedepthsofthecrisisof1997-98camerenewedcommitmentbythemajorindustrialnationstomaketheworldasaferplaceforglobalization.Thepowerofglobalhealingalsotemperedtheurgencyoffundamentalarchitecturalreforms.
Thecrisisof1997-98wasawarningofwhatwastocome.Inincreasinglyconnectedworldfinancialmarkets,systemicrisksintheemergingworldloomallthemorecritical--especiallyiftheindustrialworldhasbeenlaggingonitsownreformagenda.ThecurrenteventsunfoldinginArgentina,alongwiththepotentialforanewroundofcontagioninBrazilandelsewhereinLatinAmerica,arethelatestpainfulreminderofjustsuchapossibility.ThequickfixofreflationaryinterestratecutsisnotthepanaceaforaBraveNewWorldinneedoffundamentalreform.Ithightimetofaceuptotheheavyliftingthatisneededtomakeglobalizationwork.Untilthatoccurs,Isuspecttheglobaleconomywillremainmorerecessionpronethanever.
Inanutshell,theEuropeaneconomyisrunningatadangerouslyslowspeedthatmakesitvulnerabletoadverseshocks,allthemoresothatithasnoeconomicpolicytoolatitsdisposaltocounterattack.Thenextquestioniswhatkindofshockcouldpulltherecessiontrigger?
First,thetwogrowthkillersthatprowledaroundearlierthisyear,energypricesandglobaltradeturbulence,arestillthreatening.Atoddswithothercommodityprices(whichslideinsyncwiththeglobalslowdown),oilmarketsremainlargelydependentonsupplysideconditions,andwecannotruleoutanotherburst.Asforglobaltradetrends,wefindthatitisstilltooearlytocallforabottomandafurtherdropcertainlycannotberuledouteither.Germanywouldbethefirsttosufferfromit,beingthelargestoverseasexporterinEurope.Second,our"surprisegapindex"isstillpointingtoaninventoryoverhang.Third,monetarypolicyhasbecomerestrictive,asnominalGDPgrowthsloweddownmarkedlybelownominalinterestrates.Andthen,therearelocalhurdlesthatmighthavebroaderconsequencesinacontextofgeneralizedweakness.
Becauseofitsstructuraldefects,thebuildingwasgoingto
collapsewhentheright“shock”camealong.Soitgoeswithfinancialand
realeconomiccollapses,Dornbuschandmanyotherswouldargue.
Whileitwillalwaysbedifficulttoanticipatetheparticulareventthat
precipitatesacollapse,itisimportanttoconstantlyassessthevulnerability
offinancial,product,andlabormarketstopotentialshocks.
Macroeconomistsandforecasterstendtofocusprimarilyontheoverall
healthoftheeconomyasmeasuredbyaggregatedemandorbythe
unemploymentrate;theymaybeabletoimprovetheireconomicmodels
byincorporatingvulnerability.
3.
method
Todoso,theywillneedtodevelopnewtools.In
Asia,forexample,policymakersshouldhavehadabetterassessmentof
theabilityofthefinancialsystemtoabsorbshockstocurrencyvaluations.
Developingsuchanassessmentwouldlikelyhavebeenhampered,bytheinabilitytoobtainkey
dataonthedebtportfoliosoffinancialinstitutions,theperformanceof
bankloans,andtheexposureofthecountryasawholetoexchangerate
risk.
Underourpresentsystemoffloatingexchangerates,anexchange-ratechangecanaugmentthetraditionalinterest-ratechannelofmonetarypolicy.AsU.S.interestratesfall,internationalinvestorsmayshifttheirportfoliosfromdollar-denominatedassetstoforeign-currency-denominatedassets,whichnowhavehigheryields.Astheydo,dollarexchangerateswillfall,makingU.S.exportsmoreattractivethanforeigngoodsandservices.WorlddemandwillshifttowardtheU.S.market.
3.
Exchangerateissuesareveryimportantinemergingmarketeconomieswithagreatdeal
ofinternationaltradeandwithlessthanfullydevelopedfinancialmarkets.Ofcourse,open
economyissueshavenotbeenignoredintheresearchonpolicyruleevaluation.Theexchange
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rateispartofthetransmissionmechanisminmanymodels.Itplaysaroleinaggregatedemand
throughnetexportsanddirectlyininflationaschangesintheexchangeratearepassedthrough
todomesticprices.Moreover,thereisalinkbetweentheexchangerateandtheinterestrate
throughcapitalmarkets.Ingeneral,policyruleresearchershaveusedmodelswithahighdegree
ofcapitalmobility.
Forexample,myproposalforapolicyrule(theoneonthebusinesscard)wasbasedon
simulationsofamodelthatincludedlargeexchangerateeffects—myownlargeopeneconomy
modelwithsevenindustrialcountries.Iomittedtheexchangerateasavariableinthepolicy
rule,notbecauseIhadaclosedeconomyviewoftheworld,butbecausereactingtothe
exchangeratebymorethananegligibleamountcausedadeteriorationofinflationandreal
outputperformance.Anyreactionoftheinterestratetotheexchangeratewouldbeindirect,
throughtheeffectoftheexchangerateoninflationandtheoutputgap.
However,thatconclusiondoesnotnecessarilyholdforsmallopeneconomies.A
country’ssizeandopennessshouldmatter.RecentworkbyLaurenceBall(1999)andLars
Svensson(2000)onsmallopeneconomymodelshasexaminedtheroleoftheexchangeratein
policyrulesexplicitly.BallandSvenssonhaveproposedpolicyrulesoftheformofthesimple
benchmarkrulethatIhavebeendiscussing,butwiththeexchangerateincluded.Intheserules
anappreciationoftheexchangeratecallsforacutintheinterestrate,followedinthe“next
period”byanoffsetting,oratleastpartiallyoffsettingincreaseintheinterestrate.(The
favorableeffectsoftheappreciationoninflationarefollowedbyunfavorableeffects,whichwill
raiseinflationandrequireanincreaseintheinterestrate.)Similarly,adepreciationofthe
currencywouldcallforanincreaseintheinterestrate.Therecentincreaseininterestratesby
BankIndonesiainthefaceofadepreciatingcurrencymightbeanexampleofsuchareaction.
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Ballfindsthatsucharuleimprovesonthebenchmarkrule;however,itisaverysmall
improvement.Forexample,forthesamestandarddeviationofoutput(1.4percent)theinterest
raterulethatreactstotheexchangeratereducesthestandarddeviationoftheinflationrate
arounditstargetfrom2.0percentto1.9percent.Svenssonfindsthatthisrulereducesthe
standarddeviationofCPIinflationfrom2.1to1.8percent;however,hisresultsalsoshowthat
thepolicyincreasesthevarianceofoutputslightly,from1.7to1.8percent;thus,itdoesnot
dominatethebenchmarkrule.Ihavealsodonesimulationsandfoundthatreactingtothe
exchangeratedidnothaveanunambiguouseffectondomesticeconomicstability
Takenliterally,theresultsimplythatsimplepolicyrulesthatfocusoninfla
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