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A monetary model of China–US trade relations

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  • Cheng, Wenli
  • Zhang, Dingsheng

Abstract

This paper develops a general equilibrium monetary model to study China–US trade relations. The model captures two main features of China–US trade: China's fixed exchange rate regime and the use of the US dollar as the international medium of exchange. The main conclusions of this paper are threefold. First, an improvement in the productivity of China's tradable sector would benefit both China and the US. Second, a RMB appreciation would reduce consumption in the US and increase consumption in China, and would likely reduce China's trade surplus. It would also lead to a contraction in China's tradable sector and an expansion in US's tradable sector. Third, a monetary expansion in the US would hurt China because it would lead to a transfer of wealth from China to the US, a fall in China's relative wage rate and terms of trade, and an artificial expansion in China's tradable sector. A US monetary expansion would also increase China's trade surplus.

Suggested Citation

  • Cheng, Wenli & Zhang, Dingsheng, 2012. "A monetary model of China–US trade relations," Economic Modelling, Elsevier, vol. 29(2), pages 233-238.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:2:p:233-238
    DOI: 10.1016/j.econmod.2011.10.002
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    2. Cheng, Wenli & Zhang, Dingsheng, 2016. "How might the South be helped by Northern technology yet harmed by Northern money?," Economic Modelling, Elsevier, vol. 55(C), pages 83-91.

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    More about this item

    Keywords

    China–US trade; Productivity improvement; RMB appreciation; Monetary policy;
    All these keywords.

    JEL classification:

    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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