Arvind Subramanian on China's Exchange Rate

October 5, 2011 9:15 AM

From the WSJ: "A country that grows more rapidly than another because of faster productivity gains should see its wages and prices also rise faster and hence should become less competitive than the other country. In other words, faster growth in one country should lead to an appreciation of its currency relative to the other. In this view, China, which has been growing on average about 5-6 percent faster a year (in per capita terms) than the rest of the world should have seen its currency rise by about 1.5-2 percent a year. In fact, through much of the 2000s, the real value of the yuan has remained steady (after controlling for inflation in China and the rest of the world) when in fact it should have been steadily rising."

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