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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|7453||2008||12 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : China Economic Review, Volume 19, Issue 2, June 2008, Pages 183–196
A substantial number of papers have proposed to allow for more exchange rate flexibility of the Chinese yuan. But few papers have tried to project how Chinese monetary policy will behave under flexible exchange rates. As Japan provides an important role model for China, this paper studies the role of the yen/dollar exchange rate for Japanese monetary policy after the shift of Japan from a fixed to a floating exchange rate regime. In contrast to prior studies, we allow for regime shifts in the impact of the exchange rate on monetary policy. The results show that the exchange rate had a substantial impact on Japanese monetary policy in periods of appreciation. This implies that repeated attempts to soften the appreciation pressure by interest rate cuts have led Japan into the liquidity trap. The economic policy conclusion for China is to keep the exchange rate pegged (to the dollar).
An increasing number of papers are discussing the pros and cons of more exchange rate flexibility of the Chinese yuan (Cheung et al., 2005, Cline, 2005, Frankel, 2006, Goldstein, 2003, Goodfriend and Prasad, 2007 and McKinnon and Schnabl, 2006). Proponents of a flexible yuan have stressed the need for macroeconomic flexibility in the economic catch-up process of the Chinese economy (Frankel, 2006 and Goldstein, 2003). Given buoyant capital inflows it has been argued that a substantial appreciation of the Chinese yuan would help to prevent a possible overheating of the Chinese economy and to correct the trade imbalance between China and the US (Goldstein, 2003). In contrast, proponents of the Chinese dollar peg have argued that the stability of the Chinese yuan against the dollar had a stabilizing impact not only for China itself but for East Asia as a whole (McKinnon, 2004 and McKinnon, in press). The reason is that growth tends to be led by exports and China's fast rising international assets are denominated in foreign currency (McKinnon & Schnabl, 2004). Furthermore, McKinnon and Schnabl (2006) have argued that for countries in the economic catch-up process fixed exchange rates provide a more stable framework for the adjustment of labour and asset markets. They argue that Japan's repeated attempts to soften (productivity driven) appreciation pressure by interest rate cuts have finally led Japan into the liquidity trap. Up to the present, comparatively few papers have focused on the question of how Chinese monetary policy is likely to behave under a flexible exchange rate regime. Japan provides an important case study for the prospects of the Chinese monetary policy under a freely floating exchange rate for at least four reasons. First, like in China today, growth in Japan has been traditionally led by exports (McKinnon & Ohno, 1997). Second, like Japan China is an important saving surplus country and has accumulated large stocks of dollar denominated international assets (McKinnon & Schnabl, 2004). Third, Japan has shifted from a fixed to a flexible exchange rate regime in the early 1970s which is recommended for China today. Forth, back in early 1970s up to the late 1980s Japan was in the economic catch-up process like China is today. In this context we are interested in the question of if and how in Japan “fear of appreciation” affected the Bank of Japans' interest rate decisions. A substantial number of previous studies ( Chinn and Dooley, 1998, Clarida et al., 1998, Esaka, 2000, Funabashi, 1988, Henning, 1994, Hillebrand and Schnabl, 2006, Hutchison, 1988 and McKinnon and Ohno, 1997) have acknowledged that despite the official status of a freely floating economy the exchange rate has played an important role for Japanese monetary policy, in particular in times of appreciation. But to our knowledge no paper has formally analyzed the asymmetric impact of the exchange rate on Japanese interest rate decisions in appreciation phases and has explored the respective impact on the stability of the Japanese economy and in particular on the liquidity trap. We want to trace the possibly changing impact of the yen/dollar exchange rate on Japanese monetary policy based on a rolling Taylor type monetary policy reaction function with an exchange rate term. This allows us to provide a dynamic picture of the role of the exchange rate for Japanese monetary policy. To make an assessment of the impact of the yen appreciation on Japan's liquidity trap we introduce an interaction term into the GMM framework. We will show that Japan's repeated attempts to soften appreciation pressure by discretionary interest rate cuts have contributed to substantial economic instability and Japan's fall into the liquidity trap.
نتیجه گیری انگلیسی
We estimate Eq. (3) for three alternative observation periods. (1) The whole observation period ranging from the end of the Bretton–Woods System until Japan's fall into the liquidity trap in March 19994, (2) the observation period of Clarida et al. (1998) from April 1979 to December 1994 and (3) a period from April 1979 to March 1999 which excludes the period up to 1978 as by Clarida et al. (1998).5 We are primarily interested in the question of how the exchange rate affected the Bank of Japan's interest rate setting. Based on former studies such as those of McKinnon and Ohno (1997) and McKinnon and Schnabl (2004), we would expect a positive δ coefficient for two reasons. First, as appreciations affect the competitiveness of exports negatively, the Bank of Japan may have tended to lower interest rates to soften yen appreciation and thereby to sustain growth. Second, as Japan's very high international assets are mostly denominated in US dollars, yen appreciations against the dollar lower the worth of these assets in terms of domestic currency, for instance in the balance sheets of financial institutions. Interest rate cuts in times of appreciation enhance financial stability and are therefore in the interest of both the export and the financial sector. Both characteristics also apply to China. The results of the static estimations for the Bank of Japan are reported in Table 1. They are mainly in line with Clarida et al. (1998) revealing a significant impact of the output gap, inflation and the exchange rate on Japanese monetary policy. In specific the δ coefficients have the expected signs and are highly significant for all observation periods providing robust evidence for a strong impact of the exchange rate on Japanese monetary policy. Interest rates were cut (increased) in appreciation (depreciation) phases. This is in line with previous research as listed in Section I. For the whole observation period from 1974:01 up to 1999:03 the coefficient δ is positive and significant at the 5%-level. The size of the δ-coefficient suggests that an appreciation (depreciation) of the Japanese yen by 10 yen below (above) the target value led ceteris paribus to an interest rate cut (increase) by 0.83 percentage points.The result for the observation period of Clarida et al. (1998) from 1979:04 to 1994:12 is similar. The exchange rate term is significant at the 1%-level and the size of the coefficient is even larger suggesting that during this shorter period interest rates were cut (increased) by 1.2 percentage points in reaction to an appreciation (depreciation) by 10 yen per dollar below (above) the target value. For the observation period from April 1979 to March 1999 the impact of the exchange rate on the interest rate is even stronger (1.7 percentage points interest rate cut (increase) in response to an appreciation (depreciation) by 10 yen per dollar below (above) the target value. The coefficients which measure the impact of output and inflation on Japanese interest rate decisions have the expected positive signs and are highly significant for all observation periods. In contrast, as shown in Table 2 for the Federal Reserve there is weak evidence that the exchange rate had a recognizable impact on US interest rate decisions. The result is similar to the Bank of Japan for the whole observation period, as the exchange rate term is negative6 and turns out significant at the 5% level. Yet, the exchange rate term δ is significantly smaller than for Japan and is insignificant for the other two observation periods. The coefficients which show the impact of output and inflation on the Federal Reserves' monetary policy have the expected signs and are highly significant.To this end, the static estimations suggest that – in contrast to the Federal Reserve – the Bank of Japan pursued with one instrument (interest rate) three targets (inflation, output, exchange rate). This may imply conflicts between the single targets such as between the exchange rate and inflation. For instance when interest rates are reduced (money supply expanded) to counteract “excessive” appreciation, this may contradict the targets of low inflation and financial stability. Indeed, the substantial interest rate cuts in 1986 and 1987 which intended to stop the yen appreciation (see upper panel of Fig. 1) increased the liquidity supply to the Japanese economy which fuelled the speculation in the Japanese real estate and stock markets (Hoffmann & Schnabl, 2007).7 The burst of the Japanese bubble led into the “lost decade” of the Japanese economy during the 1990s.