RMB Appreciation, Output Growth, and Inflation

Following Dibooglu and Kutan (2005), we construct a structural VAR model to investigate the impact of RMB (the Chinese currency) appreciation on growth and inflation in China. The empirical results show that RMB appreciation has negative effects on output growth and inflation while neither effect is statistically significant. However, exchange rate shocks are important in the fluctuations of output growth and inflation. We also simulate the scenario of a sharp currency appreciation compared to the gradual approach adopted by the Chinese government. In the counterfactual analysis we find that a sharp appreciation would lead to more violent shocks in economic growth and inflation compared to the gradual approach.