China’s unreal exchange rate

Finally, some sensible journalism : http://www.economist.com/blogs/freeexchange/2010/11/exchange_rates

It’s a bit of a chore to listen to politicians debate exchange rates … The US for a long time has been asserting that China is ‘unfairly’ offering an advantage locally through undervalued rates … and more recently China is retorting that America’s new monetary stimulus is reckless (heaven forbid it might devalue their USD denominated debt).

But isn’t this all missing the point? Why aren’t politicians discussing the real exchange rate (which takes prices in to account). http://www.economist.com/node/17420096

If China doesn’t revalue up more rapidly, then prices will rise, either way the imbalance is removed. Sure, it will take longer, prices are sticky. Some of my professors at Columbia quantified this : http://www2.gsb.columbia.edu/faculty/mgiannoni/research.html … I think they found it took around 6 months to adjust but don’t quote me on that.

Indeed the real exchange rate with China has risen quite rapidly. The gov’t controls the nominal rate, but can’t control the prices – the real rate will equalize over time.

There’s a lot more to the economics … but my angst is the politicians, why (arguably) waste so much bandwidth on this non-issue?

Advertisement

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: