Rural-led exchange rate appreciation in China

- China has too much labor in rural nontradables.
- When rural labor leaves, the supply of nontradables falls.
- When labor is efficiently allocated, demand for all goods rises.
- If the supply of nontradables falls and the demand rises, the price rises.
- This price is the real exchange rate, so rural emigration causes appreciation.

The departure of a factor in excess supply in a non-traded rural sector leads to a Rural-led Exchange Rate Real Appreciation (RERA), in a dual economy setup. The RERA highlights for the first time a potential link between intra-national factor movements and real exchange rates. In China, where there is excess labor employed in the production of (largely) non-traded rural goods, we attribute around one third of the recent appreciation of the real exchange rate - defined as the relative price of nontradables - to a RERA effect.