What we have learned - Macroeconomic policy after the crisis, 2014

What we have learned_Macroeconomic policy after the crisis, 2014

 

21. Exchange Rate Arragenements - China, Yi Gang (PBC governor since 2018, deputy governor under Zhou Xiaochuan, 2003~2018)

 

China as optimal currency area

despite per capita income gap as large as five times between eastern(Pearl River Delta) and western(Guizhou, Qinghai) China, much wider than gap within Eurozone, at 1.5 times between Germany and Greece, China stands a better chance as optimal currency area.

- fiscal transfer between provinces(en.wikipedia.org/wiki/Transfer_payment),

- mobile labor market - urban migratory workers

- unified domestic market - system of trading and transportation integrated, homogeneous commodity and product market

- effective macroeconomic policy

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Choice over exchange rate regimes shifted through ages since dismantling of Bretton Woods, 1971~1973.

 i.e. IMF's view; under Bretton Woods, IMF preferred fixed rates. Before Argentine crisis, argued for either fixed or floating;after, called for floating rates. After 2009, said both regimes have merits and demerits.

 

Floating rate:
(+)more resistable to shocks.
Easier to adjust, protects against speculative attacks. No misallocation caused by exchange rate distortions.
(-) larger exchange risks, more fluctuation/uncertainty

 

Fixed rate:
(+) draws in investment and trade, lower inflation(in developing)
(-) vulnerable to currency crisis(Peso), speculative attacks

 

China until 2005 pegged RMB to USD, due to: coupled depreciating value following USD; favorable conditions - stable growth and low inflation, financial market development, capital account opening ->throughout till 2013, nominal rate upped 32%, REER upped 36%

During global financial crisis, narrowed RMB's daily floating band, thus lessened the impact.

 

 

Yi Gang

www.scmp.com/news/china/economy/article/2137763/china-appoints-yi-gang-central-bank-governor-liu-he-vice-premier

Zhou Xiaochuan

www.centralbanking.com/awards/4005606/lifetime-achievement-zhou-xiaochuan