China’s macroeconomic policies and spillover effects
Niemeläinen, Julia (26.09.2023)
Numero
5/2023Julkaisija
Bank of Finland
2023
Julkaisun pysyvä osoite on
https://urn.fi/URN:ISBN:978-952-323-447-5Tiivistelmä
This paper provides a brief overview of China’s capital controls, external asset holdings and the real interest rate, and analyzes the quantitative effects of China’s macroeconomic policies between 2000 and 2015, including capital controls, interest rate policy, exchange rate policy and fiscal policy, on the dynamics of China’s trade balance vis-a-vis the United States and the world real interest rate. In my analysis, I take into account the demographic differences between the countries, which affect the external imbalances directly and indirectly by affecting the transmission of the macroeconomic policies. Capital controls in China remain stringent even though they have somewhat eased in 2010s, and its gross external asset holdings differ from its peer countries both in terms of the largest functional categories and by type of investment. The average interest rate spread with the US has narrowed down. According to my analysis, the macroeconomic policies overall, and mainly the undervaluation of the real exchange rate, have had a positive impact on China’s trade balance. The impact of the macroeconomic policies on the real interest rate has been positive, countering the negative trend induced by demographic factors.
Julkaisuhuomautus
NON-TECHNICAL SUMMARY
FOCUS
China has practiced macroeconomic policies which have distorted both its intratemporal terms of trade (i.e. the price of foreign goods in the domestic market) and intertemporal terms of trade (i.e. the real interest rate): there has been evidence of real exchange rate has undervaluation, and China’s capital account restrictions have been strong. At the same time, China has run a persistent trade surplus and become a significant global net creditor. To what extent have these policies contributed to China’s strong external position and the world real interest rate?
CONTRIBUTION
I build a two-country dynamic general equilibrium model describing the behaviour of Chinese policymakers to analyze the effects of China’s macroeconomic policies between 2000-2015 on the dynamics of its trade balance and the real interest rate. The paper provides a quantitative theory-based assessment of the importance of government policies on the observed external imbalances. I also provide a brief overview of China’s capital controls, external asset holdings and the real interest rate.
FINDINGS
I find that the macroeconomic policies of 2000-2015 overall had a strong positive impact on the trade balance. The effects are driven by the real exchange rate policy, which has caused households to postpone consumption into the future. I also find that the macroeconomic policies had a positive impact on the international real interest rate, as they have resulted in a reduction in world aggregate savings.
FOCUS
China has practiced macroeconomic policies which have distorted both its intratemporal terms of trade (i.e. the price of foreign goods in the domestic market) and intertemporal terms of trade (i.e. the real interest rate): there has been evidence of real exchange rate has undervaluation, and China’s capital account restrictions have been strong. At the same time, China has run a persistent trade surplus and become a significant global net creditor. To what extent have these policies contributed to China’s strong external position and the world real interest rate?
CONTRIBUTION
I build a two-country dynamic general equilibrium model describing the behaviour of Chinese policymakers to analyze the effects of China’s macroeconomic policies between 2000-2015 on the dynamics of its trade balance and the real interest rate. The paper provides a quantitative theory-based assessment of the importance of government policies on the observed external imbalances. I also provide a brief overview of China’s capital controls, external asset holdings and the real interest rate.
FINDINGS
I find that the macroeconomic policies of 2000-2015 overall had a strong positive impact on the trade balance. The effects are driven by the real exchange rate policy, which has caused households to postpone consumption into the future. I also find that the macroeconomic policies had a positive impact on the international real interest rate, as they have resulted in a reduction in world aggregate savings.