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Hoarding of international reserves in China: Mercantilism, domestic consumption and US monetary policy

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  • Bonatti, Luigi
  • Fracasso, Andrea

Abstract

We develop a two-country two-period model able to reproduce the key qualitative aspects of the US-China co-dependency (and imbalances) as the result of the Chinese and American authorities pursuing different but complementary objectives. We show that a mercantilist reserve hoarding has served well the Chinese policy goals (fast GDP expansion and labor mobilization) and has been compatible with the US ones (high households' consumption). If the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China, this latter finds less tempting to stop financing the US external deficit, appreciate the currency and increase consumption. On the contrary, if the policy goals in China change from the maximization of GDP growth to higher households' standards of living, a rebalancing process may be ignited. We then discuss the model and its theoretical predictions, also in light of the Five-Year Plans approved by the Chinese ruling Party.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 1044-1078

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Handle: RePEc:eee:jimfin:v:32:y:2013:i:c:p:1044-1078

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: China–US co-dependency; Global imbalances; Reserve accumulation; External debt;

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Cited by:
  1. Cheng, G., 2013. "A Growth Perspective on Foreign Reserve Accumulation," Working papers 443, Banque de France.
  2. Luigi Bonatti & Andrea Fracasso, 2012. "The costs of rebalancing the China-US co-dependency," Rivista Internazionale di Scienze Sociali, Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore, vol. 120(1), pages 59-106.
  3. Bonatti, Luigi & Fracasso, Andrea, 2014. "Modeling the Transition Towards Renminbi's Full Convertibility: Implications for China’s Growth," MPRA Paper 54129, University Library of Munich, Germany.
  4. Bonatti, Luigi & Fracasso, Andrea, 2013. "Regime switches in the Sino-American co-dependency: Growth and structural change in China," Structural Change and Economic Dynamics, Elsevier, vol. 25(C), pages 1-32.

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