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Home Publications Blogs Beat the Press China and Inflation: A Higher Currency Stems Inflation

China and Inflation: A Higher Currency Stems Inflation

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Saturday, 18 December 2010 09:20

The NYT reported that inflation in China is higher than its leadership's targets. It might have been worth noting that a higher valued currency helps to lower inflation.

This is for two reasons. First, insofar as inflation is driven by excess demand, a higher valued currency will reduce exports (it makes them more expensive for foreigners) and thereby bring demand more in line with potential output.

A higher valued currency will also make imported items, like food and oil, less expensive. This will directly reduce inflation.

For some reason China is apparently not considered this obvious path for addressing its problems with inflation.

Comments (2)Add Comment
Chinese inflation.
written by Ralph Musgrave, December 18, 2010 11:03
“For some reason China is apparently not considered this obvious path for addressing its problems with inflation.” Possibly they think they can control inflation by raising interest rates, which is what they are currently doing, but that just sucks in hot money: not much of a solution.
interest rates
written by dunkelblau, December 18, 2010 12:31
worked fine for Mr Volcker

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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