Stabilization Policy in an Economy with Two Exchange Rate Regimes

Sven W. Arndt

doi:10.1515/1524-5861.1846

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Stabilization Policy in an Economy with Two Exchange Rate Regimes

Sven W. Arndt

Published/Copyright: June 6, 2012

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From the journal Global Economy Journal Volume 12 Issue 2

This paper uses a flex-price open economy macro model to examine the effectiveness of U.S. monetary and fiscal policies when the dollar floats freely against the euro, but is fixed against the Chinese yuan. It is assumed that capital mobility is high between the U.S. and the Eurozone, but low between the U.S. and China. The model allows for short-run price flexibility and imperfect substitutability between domestic and foreign financial assets.The focus is on the implications for the efficacy of U.S. macro stabilization policies of China's fixed-rate strategy. While many countries have pegged their currencies to the dollar, China is large enough to have an impact. It is shown that its large size enables China to impede the effectiveness of U.S. macroeconomic policies. Indeed, while the U.S. is officially tagged as an independent floater, Chinese intervention is capable of interfering with dollar-euro flexibility and thereby creates outcomes that are more consistent with policy under fixed rates.

Keywords: open economy macro; exchange rate regimes; U.S.-China payments adjustment

Published Online: 2012-6-6

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Articles in the same Issue

https://doi.org/10.1515/1524-5861.1846

Keywords for this article

open economy macro; exchange rate regimes; U.S.-China payments adjustment