IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v41y2016icp253-261.html
   My bibliography  Save this article

Unemployment and optimal currency intervention in an open economy

Author

Listed:
  • Jin, Hailong
  • Choi, Yoonho
  • Kwan Choi, E.

Abstract

This paper investigates whether China, with unemployed resources, can benefit from a trade surplus in one period and a deficit in the next by manipulating the yuan's peg. A country may be tempted to stimulate its economy temporarily by devaluation, but any surplus so generated subsequently must be expended with inescapable reverse output effect. It is shown that under reasonable conditions, nonintervention is the optimal policy and the optimal exchange rates are the equilibrium rates that yield a trade balance in each period. Numerical examples using the Cobb–Douglas utility function illustrate the main proposition.

Suggested Citation

  • Jin, Hailong & Choi, Yoonho & Kwan Choi, E., 2016. "Unemployment and optimal currency intervention in an open economy," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 253-261.
    • Handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:253-261
    DOI: 10.1016/j.iref.2015.08.008
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056015001276
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2015.08.008?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Hailong Jin & E. Kwan Choi, 2013. "China's Profits and Losses from Currency Intervention, 1994-2011," CESifo Working Paper Series 4551, CESifo.
    2. Kan Yue & Kevin Honglin Zhang, 2013. "How Much Does China's Exchange Rate Affect the U.S. Trade Deficit?," Chinese Economy, Taylor & Francis Journals, vol. 46(6), pages 80-93, November.
    3. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2010. "China's Current Account and Exchange Rate," NBER Chapters, in: China's Growing Role in World Trade, pages 231-271, National Bureau of Economic Research, Inc.
    4. Devereux, M. B., 2000. "How does a devaluation affect the current account?," Journal of International Money and Finance, Elsevier, vol. 19(6), pages 833-851, December.
    5. Yin-Wong Cheung, 2012. "Exchange Rate Misalignment - The Case of the Chinese Renminbi," CESifo Working Paper Series 3797, CESifo.
    6. Jin, Hailong & Choi, E. Kwan, 2013. "Profits and losses from currency intervention," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 14-20.
    7. Helpman, Elhanan, 1976. "Macroeconomic Policy in a Model of International Trade with a Wage Restriction," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 17(2), pages 262-277, June.
    8. Bruno, Michael, 1976. "The Two-Sector Open Economy and the Real Exchange Rate," American Economic Review, American Economic Association, vol. 66(4), pages 566-577, September.
    9. John T. Cuddington, 1981. "Import Substitution Policies: A Two-Sector, Fix-Price Model," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 327-342.
    10. Batra, Raveendra N & Beladi, Hamid, 1990. "Pattern of Trade between Underemployed Economies," Economica, London School of Economics and Political Science, vol. 57(228), pages 485-493, November.
    11. Ravi Batra & Hamid Beladi, 2013. "The US Trade Deficit and the Rate of Interest," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 614-626, September.
    12. Hailong Jin & E. Kwan Choi, 2014. "China's Profits and Losses from Currency Intervention, 1994–2011," Pacific Economic Review, Wiley Blackwell, vol. 19(2), pages 170-183, May.
    13. Jin, Hailong & Choi, E Kwan, 2014. "China's Profits and losses from currency Intervention, 1994-2011," Staff General Research Papers Archive 37380, Iowa State University, Department of Economics.
    14. Hamid Beladi & Reza Oladi, 2014. "On Offshoring and Trade Deficit," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 517-523, August.
    15. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-654, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Choi, Yoonho & Choi, E. Kwan, 2018. "Unemployment and optimal exchange rate in an open economy," Economic Modelling, Elsevier, vol. 69(C), pages 82-90.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Choi, Yoonho & Choi, E. Kwan, 2018. "Unemployment and optimal exchange rate in an open economy," Economic Modelling, Elsevier, vol. 69(C), pages 82-90.
    2. Choi, E. Kwan & Jin, Hailong, 2014. "Currency intervention and consumer welfare in an open economy," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 47-56.
    3. Hongxing Yao & Abdul Rashid Abdul Rahaman, 2018. "Efficient Market Hypothesis and the RMB-Dollar Rates: A Nonlinear Modeling of the Exchange Rate," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 10(2), pages 150-160, February.
    4. Hailong Jin & E. Kwan Choi, 2013. "China's Profits and Losses from Currency Intervention, 1994-2011," CESifo Working Paper Series 4551, CESifo.
    5. Alexander Erler & Stefan Hohberger, 2016. "Editor's Choice TARGET2: How Costly is Buying Time?," CESifo Economic Studies, CESifo, vol. 62(3), pages 491-505.
    6. Parviz Asheghian & William G. Foote, 1988. "Exchange Rate Devaluation: A Monetary Model and Empirical Investigation," Eastern Economic Journal, Eastern Economic Association, vol. 14(2), pages 181-187, Apr-Jun.
    7. Hailong Jin & E. Kwan Choi, 2014. "China's Profits and Losses from Currency Intervention, 1994–2011," Pacific Economic Review, Wiley Blackwell, vol. 19(2), pages 170-183, May.
    8. Michael Bruno, 1980. "Import Competition and Macro Economic Adjustment under Wage-Price Rigidity," NBER Working Papers 0522, National Bureau of Economic Research, Inc.
    9. Ioannis Kaskarelis, 1991. "Output fluctuations with bargained wages and a competitive tradeable goods sector in the economy: Empirical estimates for the group of five, 1970.1 — 1985.4," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 127(1), pages 42-72, March.
    10. Vivien Lévy-Garboua & Bruno Weymuller, 1979. "Le taux de change à long terme : les enseignements des modèles," Revue Économique, Programme National Persée, vol. 30(4), pages 676-718.
    11. An, Lian & Kim, Gil & Ren, Xiaomei, 2014. "Is devaluation expansionary or contractionary: Evidence based on vector autoregression with sign restrictions," Journal of Asian Economics, Elsevier, vol. 34(C), pages 27-41.
    12. Min Lu, 2012. "Current account dynamics and optimal monetary policy in a two-country economy," International Journal of Monetary Economics and Finance, Inderscience Enterprises Ltd, vol. 5(3), pages 299-324.
    13. Soriano, Ma. Cecilia G., 1990. "Classifying the Economy into Traded or Nontraded Sectors," Philippine Journal of Development JPD 1990 Vol. XVII No. 2-, Philippine Institute for Development Studies.
    14. Philip L. Brock, 2009. "Collateral Constraints and Macroeconomic Adjustment in an Open Economy," Working Papers UWEC-2009-03, University of Washington, Department of Economics.
    15. Guonan Ma & Wang Yi, 2010. "China’s High Saving Rate: Myth and Reality," International Economics, CEPII research center, issue 122, pages 5-39.
    16. NAGHDI Yazdan & KAGHAZIAN Soheila, 2015. "The Effects Of Asymmetric Transmission Of Exchange Rate On Inflation In Iran:Application Of Threshold Models," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 10(2), pages 99-113, August.
    17. Seghezza, Elena & Morelli, Pierluigi & Pittaluga, Giovanni B., 2017. "Reserve accumulation and exchange rate policy in China: The authoritarian elite's aim of political survival," European Journal of Political Economy, Elsevier, vol. 46(C), pages 40-51.
    18. Yin‐Wong Cheung & Xingwang Qian, 2009. "Empirics Of China'S Outward Direct Investment," Pacific Economic Review, Wiley Blackwell, vol. 14(3), pages 312-341, August.
    19. Joshua Aizenman, 1985. "Wage Flexibility and Openness," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 539-550.
    20. Blaise Gnimassoun & Valérie Mignon, 2013. "Current-account adjustments and exchange-rate misalignments," Working Papers hal-04141182, HAL.

    More about this item

    Keywords

    Unemployment; Currency intervention; Optimal exchange rate;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:253-261. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.