China's exchange rate and its effect on the current account and the real output

Maintaining the current account balance is very crucial for an open economy. Nevertheless, China as the world second largest economy has been suffering a large current account imbalance during the past two decades. Such a long-term imbalance induces the argument that China has been manipulating its exchange rate for the purpose of obtaining unfair trade advantage for its exports. Therefore, the objective of this paper is to examine the effects of exchange rate changes on the current account and real output in China by employing the Structural Vector Autoregressive (SVAR) approach and the impulse responses analysis. This paper found that renminbi (RMB) depreciation has an improvement effect on the real output while having insignificant effect on the current account. However, especially after the adoption of the more flexible exchange rate regime, the negative effect of depreciation on the real output become increasingly significant. Therefore, encourages technology progress, stimulate domestic demands instead of currency depreciation could be the more effective policies for China’s future development. (Less)