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Asian Reserves and the Dollar: Is Gradual Adjustment Possible?

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  • Ashima Goyal

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Abstract

Large dollar reserves in Asian EMEs accompany large U.S. fiscal and current account deficits. Analysis of strategic sales by Asian EMEs suggests that an attack on the dollar is not certain but is possible. A unique equilibrium where Asian EMEs sell their reserves does not exist but there are multiple Nash equilibria. Therefore action, which includes adjustment, is required to coordinate to the better equilibrium. There is evidence that more flexibility in Asian exchange rates will reduce risk for Asian EMEs, but the flexibility will have to be limited, and it depends on more flexibility in the renminbi. Moreover, limits to adjustment in wages put limits on realignments between US and Asian exchange rates. Therefore while a gradual adjustment strategy is feasible it will require both expenditure switching and expenditure reduction with the latter moderated by the maintenance of robust global growth. [Abstract Only] http://www.bepress.com/gej/vol5/iss3/3

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Bibliographic Info

Paper provided by eSocialSciences in its series Working Papers with number id:252.

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Date of creation: Nov 2005
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Handle: RePEc:ess:wpaper:id:252

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Keywords: Asian EME; exchange rate; Nash equilibria; fiscal account deficit; reserves; fiscal adjustment; dollar; Economics; Money Market;

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  1. Maurice Obstfeld & Kenneth Rogoff & Richard Clarida, . "The Unsustainable US Current Account Position Revisited," Working Paper 14901, Harvard University OpenScholar.
  2. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
  3. Goyal, Ashima & Agarwal, Ankita, 2005. "Risk and Asian exchange rate regimes," MPRA Paper 24309, University Library of Munich, Germany.
  4. Ronald Jones; Henryk Kierzkowski; Chen Lurong, 2004. "What does the evidence tell us about fragmentation and outsourcing," IHEID Working Papers 09-2004, Economics Section, The Graduate Institute of International Studies.
  5. Barry Eichengreen, 2010. "Global Imbalances and the Lessons of Bretton Woods," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262514141, December.
  6. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
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Cited by:
  1. Ashima Goyal & Ankita Agarwal, 2005. "Risk and Asian Exchange Rate Regimes," Global Economic Review, Taylor & Francis Journals, vol. 34(3), pages 321-329.

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