Exchange rate movements and aggregate output: the case of China

Abstract

Applying an extended IS-MP-AS model (Romer, 2000), this paper finds that real GDP in China has a positive relationship with real depreciation during 1990-2005 and the real stock price and a negative relationship with real depreciation during 2006-2016, the lagged US real interest rate, the real oil price and the expected inflation rate. Therefore, during 1990-2005, the benefits of real depreciation such as more exports overwhelmed the costs of real depreciation such as higher import costs, higher inflation and less capital inflows whereas during 2006-2016, the benefits of real appreciation such as lower import costs, lower inflation, and more capital inflows dominated its negative effects such as less exports.