Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates

Date: January 2013
Type: Papers and Briefs
Series: Regional Economic Integration Working Papers
Author: McKinnon, Ronald; Liu, Zhao


Under near zero interest rates in the United States (US), the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows, while central banks in the same countries intervene to prevent their currencies from rising precipitously. They subsequently lose monetary control and begin inflating. In addition, primary commodity prices rise worldwide unless interrupted by an international banking crisis.

This cyclical inflation on the dollar’s periphery only registers in the US core consumer price index (CPI) with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic financial intermediation by banks and money market mutual funds is repressed. Because the People’s Republic of China (PRC) is forced to keep its interest rates below market-clearing levels, it also suffers from financial repression, although in a different form from that experienced in the US.


  • Abstract
  • Introduction
  • Hot Money Flows and Inflation in Emerging Markets
  • Price Bubbles in Primary Commodities and Political Instability
  • Financial Repression in the US
  • Financial Repression in the People’s Republic of China
  • What is the Solution?
  • References