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In Search of an Optimal Strategy for Yuan’s Real Revaluation

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  • Dai, Meixing
Abstract
International commentators seem to have a consensus view that the Chinese yuan is substantially undervalued and the Chinese monetary authority must take speedy actions to redress the currency misalignment by rapid nominal revaluation. This paper argues for a gradualist but comprehensive strategy for adjusting RMB’s exchange rate. Taking into consideration of the facts that the yuan’s undervaluation is caused by an array of domestic and international factors and the Chinese central bank cannot effectively invest its growing holdings of foreign reserves, we develop a framework to provide a theoretical underpinning for the optimal strategy for renminbi’s gradual revaluation. With this strategy, the renminbi undervaluation problem is gradually redressed through a combination of nominal appreciation and higher inflation plus some other structural and macroeconomic policies. This strategy can also allow absorb external imbalances hence strengthening the foundation of China’s long-term growth.

Suggested Citation

  • Dai, Meixing, 2012. "In Search of an Optimal Strategy for Yuan’s Real Revaluation," MPRA Paper 41047, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:41047
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    More about this item

    Keywords

    Real revaluation; renminbi (RMB); foreign reserves; external imbalances; macroeconomic adjustment;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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