Saturday 30 July 2005

China's currency peg and deflation

Now Brad Setser warns of importing deflation from China.

[Stanford University's Ronald] McKinnon believes in China's currency peg. But he also believes China should experience real appreciation through inflation differentials. We usually think that means higher inflation in China than in the US, with the US rate staying constant at levels we in the US find comfortable... But China's inflation rate...remains very modest... China is big enough that the adjustment...could come from stable prices in China and falling prices in the US and Europe.

For more on McKinnon's article (subscription required), see also the macroblog.

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