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Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets?

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  • Luigi Bonatti

    ()

  • Andrea Fracasso

    ()

Abstract

It has been argued that China may stop financing the US external deficit, appreciate the currency, increase consumption and move its economy away from tradables and towards nontradables. Our two-country model shows that paradoxically this policy option is unattractive if the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China. As long as the American and Chinese authorities pursue complementary objectives, the current China-US arrangement continues. In addition, an untimely appreciation of China’s real exchange rate may have negative consequences on employment in the US and in China.

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Bibliographic Info

Paper provided by Department of Economics, University of Trento, Italia in its series Department of Economics Working Papers with number 1105.

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Date of creation: 2011
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Handle: RePEc:trn:utwpde:1105

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Keywords: China-US co-dependency; global imbalances; reserve accumulation; external debt;

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  1. Straub, Roland & Thimann, Christian, 2010. "The external and domestic side of macroeconomic adjustment in China," Journal of Asian Economics, Elsevier, vol. 21(5), pages 425-444, October.
  2. Aizenman, Joshua & Marion, Nancy, 2009. "Using Inflation to Erode the U.S. Public Debt," Santa Cruz Department of Economics, Working Paper Series qt6xf174rs, Department of Economics, UC Santa Cruz.
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  7. Luigi Bonatti & Andrea Fracasso, 2010. "Global Rebalancing and the Future of the Sino-US Codependency," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 18(s1), pages 70-87.
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  11. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
  12. Luigi Bonatti & Andrea Fracasso, 2010. "The China-US co-dependency and the elusive costs of growth rebalancing," Department of Economics Working Papers 1004, Department of Economics, University of Trento, Italia.
  13. Niall Ferguson & Moritz Schularick, 2009. "The End of Chimerica," Harvard Business School Working Papers 10-037, Harvard Business School.
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  15. Joshua Aizenman & Jaewoo Lee, 2010. "Real Exchange Rate, Mercantilism And The Learning By Doing Externality," Pacific Economic Review, Wiley Blackwell, vol. 15(3), pages 324-335, 08.
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