Economic Development under Persistent Currency Intervention

Abstract

During the recent two decades, the spectacular economic growth of China has been under increasing scrutiny in the literature. However, prevailing discourses have either evaluated the causes/effects of the RMB exchange rate misalignment or theorized the investment/speculation channels. The implication of this persistent currency intervention (CI) regime on economic development, in comparison, remains one of the most contentious subjects in international economics. To shed light on this issue, this research develops a new macroeconomic model to address the two core attributes of China's persistent CI: the stagnant adjustment of the capital markets and the fast liberalization of the commodity markets. It investigates the impacts of macroeconomic controls on output growth and price levels from multiple aspects. It also makes several interesting discoveries in opposition to key postulations of existing macroeconomic models.