Robert Mundell

China's Macroeconomic Strategy and its Currency Relations with Asia and the International Monetary System


Abstract

The talk will discuss the theoretical and policy issues associated with the controversy over China's exchange rate and balance of payments position. China has been blamed for cuasing disequilibrium in the world economy and culpable in the more than $800 billion US current account deficit. One view is that China should bring its balance of payments into equilibrium by reducing exchange controls and expanding imports and domestic absorption.

The alternative view is that China should appreciate teh RMB by a substantial amount and/or move to a floating exchange rate to bring China's GDP, measured at the nominal exchange rate, closer to its GDP valued at the purchasing-power-parity exchange rate. That the issue is important politically is attested to by the facts that it has been brought up at every G-7 meeting since 2003 and that the US Congress threatens to impose a 27 1/2% tariff on Chinese goods if China does not comply (despite the fact that such a tariff would be illegal under the WTO). How can economic models help to elucidate the issues, and to what extent would changes in China's policy correct the U.S. deficits and help the rest of the world without harming China?


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