Title

Hot money inflows and renminbi revaluation pressure

Document Type

Journal article

Source Publication

Journal of Chinese Economic & Business Studies

Publication Date

2-1-2007

Volume

5

Issue

1

First Page

19

Last Page

36

Keywords

Hot money, renminbi revaluation, pegged exchange rate regime, government intervention

Abstract

Despite a series of revaluations, which started in July 2005, hot money has been sporadically sneaking into China in anticipation of further revaluations of the renminbi. In this paper we build a monetary model to show how anticipated revaluations lead to the instability of a pegged exchange rate regime. This model assumes current account convertibility and some degree of capital control, and fundamentally sound domestic policies and economy, as is the case in China. The model demonstrates that market-oriented interest rates can act as an automatic stabilizer to ease revaluation pressures, but cannot resolve them completely because the nominal interest rate has a zero nominal bound. Therefore, the official parity is difficult to defend and the revaluation expectations can be self-fulfilling, in the absence of external intervention. The empirical results of Granger causality tests are consistent with the main findings of our theoretical model. There are a number of policy intervention measures that can extend the life of a pegged exchange rate regime.

DOI

10.1080/14765280601109220

Print ISSN

14765284

E-ISSN

14765292

Publisher Statement

Copyright © 2007 The Chinese Economic Association-UK

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Full-text Version

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Recommended Citation

Ma, Y., & Sun, H. (2007). Hot money inflows and renminbi revaluation pressure. Journal of Chinese Economic & Business Studies, 5(1), 19-36. doi: 10.1080/14765280601109220