This dissertation is to develop a set of models that examine the impact of productivity on a series of important variables in an open economy, in particular the monetary adjustment mechanism and the equilibrium exchange rate. The framework can be used to study economies experiencing rapid economic growth with imperfect capital mobility. It produces some empirical evidence on the current exchange rate misalignment in China. It shows that the currency is not significantly undervalued and that the fixed exchange rate regime worked effectively in China before it unexpectedly switched to managing floating exchange rate under enormous international pressure. |