EAF_HuangYiping_20100315 - East Asia Forum Krugmans Chinese...

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- East Asia Forum - http://www.eastasiaforum.org - Krugman’s Chinese renminbi fallacy Posted By Yiping Huang On 15 March 2010 @ 10:00 pm In China, Exchange Rates, Financial crisis, United States | 7 Comments Author: Yiping Huang, Peking University and ANU Paul Krugman is one of the international economists I most respect. He is a towering figure in the study of international trade. But his understanding of some international economic policy issues is, to put it generously, naïve. In fact, were the Obama administration to follow his policy advice, the world economy could encounter more serious difficulties, if not another recession, in the years ahead. In the year 2010, Krugman suddenly found a new and passionate interest in China’s exchange rate policy. On 1 January, in his piece ‘Chinese New Year’ [1] , Krugman claimed that America had lost 1.4 million jobs because of the undervalued renminbi and, therefore, he endorsed trade protectionism against China. On 11 March, in another piece, ‘ China’s swan song [2] ‘, he advised the Treasury Department to name China as a currency manipulator. And on 12 March, at an Economic Policy Institute [3] event, in Washington, he said that global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running a trade surplus. Most economists would agree with Krugman that the renminbi is probably undervalued [4] . But the extent of misalignment remains a controversial subject. For instance, applying purchasing power parity (PPP) approach, Menzie Chinn of University of Wisconsin, Madison, and his collaborators used to discover undervaluation of about 40 per cent. But after the World Bank’s 40 per cent downward revision of Chinese GDP in PPP terms, that undervaluation disappeared completely. Nick Lardy and Morris Goldstein of the Peterson Institute of International Economics suggested that renminbi was probably only undervalued by 12-16 per cent at the end of 2008. My colleague Yang Yao and his collaborator at the Peking University found even less misalignment. The renminbi exchange rate is but one [5] , and perhaps not even the most important, factor behind China’s large trade and current account surpluses. Among other factors, economic studies have attributed the recent surge in China’s external imbalances to the unique population dividend and the relocation of industries from other Asian economies. My own research has also highlighted the importance of distortions in domestic factor markets, which were largely legacies of the pre-reform
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This note was uploaded on 09/03/2011 for the course ECONS 101 taught by Professor Hendrik during the Spring '11 term at National University of Singapore.

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EAF_HuangYiping_20100315 - East Asia Forum Krugmans Chinese...

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