Currency appreciation, rising financial asset values, and output fluctuations in China

Abstract

Applying a general equilibrium model and the Newey-West method, this article finds that real output in China has a positive relationship with real M2, the government deficit/GDP ratio, and the real stock price and a negative relationship with real appreciation. The expected inflation rate is insignificant. It is estimated that when the real effective exchange rate rises 1%, real GDP in China is expected to decrease by 0.938% and that a 1% increase in real stock prices would raise output by 0.126%.

Notes

¹ For more studies and reviews of exchange rates, see Taylor (1995), Sarno and Taylor (2002) and Taylor and Sarno (2004).