Nominal and Real Exchange Rate Change by China: Global Impacts on Agricultural Prices

China's exchange rate policy has become an important factor in world agricultural trade. The renminbi, while no longer fixed in U.S. dollar terms, is subject to significant intervention, and is widely regarded as undervalued. In the long run, an undervalued exchange rate is self-correcting, as increases in the money supply raise inflation, revaluing the currency in real terms. Adjusting a real exchange rate through inflation has different consequences for China’s economy compared with an adjustment in the nominal exchange rate. The consequences for world agricultural production and trade are also different. To capture these differences, a static, partial equilibrium model was extended to include macro-economic effects. Parameter values for the model were derived from USDA’s Country Linker System (CLS) for 39 regions and 24 agricultural commodities, and from the literature on exchange rate pass-through to inflation and output. The results illustrate how standard partial equilibrium analysis overstates the impact of China’s nominal exchange rate adjustment by overlooking the impacts on inflation.


Issue Date:
2007
Publication Type:
Conference Paper/ Presentation
PURL Identifier:
http://purl.umn.edu/9692
Total Pages:
21
Note:
Replaced with revised version of paper 06/15/07.
Series Statement:
Selected Paper




 Record created 2017-04-01, last modified 2017-05-27

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