China’s post-crisis policy dilemma: multi-sectoral comparative static macroeconomics

Abstract

Although the “country runs” of the Asian crisis stopped at the Chinese border, their effects nonetheless included a realignment of real exchange rates and a rise in the risk premium demanded of investments in China. To examine alternative Chinese policy responses, this paper introduces a multi-country, multi-commodity comparative static macroeconomic model. Simulations suggest that, although the maintenance of fixed parity with the US dollar may have been necessary during the crisis, its contractionary effects were not fully offset by fiscal expansion and they were subsequently compounded by a 1999 nominal wage rise. A case emerges for increased exchange rate flexibility in the post-crisis period.