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Whether currency devaluation promotes growth remains an empirically open question. Coexistence of an undervalued currency and the world's largest trade surplus alongside a booming economy makes China a unique case study. Using annual data over 1977-2006 and the relatively recent "Bounds-testing approach" to cointegration and error-correction modeling, the authors estimate a reduced form model to investigate the exchange rate sensitivity of China's real GDP. They find that currency devaluation is contractionary in China.
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