Fed symposium on China exchange rate

Coverage from Bloomberg here.

"At a symposium at the San Francisco Federal Reserve Bank last week, more than 30 economists, mostly from universities and international institutions, tackled the issue of China's currency peg. Most of them argued that the Chinese would be forced to adopt a more flexible exchange rate regime, and some said that would come no later than next year.

On the other hand, the symposium -- which was titled, "The Revived Bretton Woods System; A New Paradigm for Asian Development?'' -- was called to discuss a series of papers by economists who maintain that the Chinese have such an overriding interest in strong growth that the peg will last at least for another five years.

National Bureau of Economic Research Working Paper published last July, Direct Investment, Rising Real Wages and the Absorption of Excess Labor in the Periphery: "If the price to be paid for this (industrialization) strategy includes financing a large U.S. current account deficit, governments in the periphery will see it in their interest to provide financing even in circumstances where private international investors would not.

"The catastrophic losses and abrupt price breaks forecast by the conventional wisdom of international macroeconomics arise from a model of very naive government behavior. In that model, periphery governments stubbornly maintain a distorted exchange rate until it is overwhelmed by speculative capital flows. In our view a more sensible political economy guides governments in Asia. The objectives are the rapid mobilization of underemployed Asian labor and the accumulation of a capital stock that will remain efficient even after the system ends.''

I discussed a number of these issues in a previous post.