Kjetil Storesletten, Zheng (Michael) Song, Fabrizio Zilibotti, 02 May 2010

China has amassed $2.4 trillion of foreign reserves over the last two decades. This column argues that it is wrong, and even dangerous, to blame this on a manipulation of the exchange rate. Instead it proposes a structural theory emphasising that credit market imperfections require private firms to build up internal savings which have been channelled into foreign bonds.

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