Stabilization Policy in an Economy with Two Exchange Rate Regimes
This paper uses a flex-price open economy macro model to examine the effectiveness of U.S. monetary and fiscal policies when the dollar floats freely against the euro, but is fixed against the Chinese yuan. It is assumed that capital mobility is high between the U.S. and the Eurozone, but low between the U.S. and China. The model allows for short-run price flexibility and imperfect substitutability between domestic and foreign financial assets.The focus is on the implications for the efficacy of U.S. macro stabilization policies of China's fixed-rate strategy. While many countries have pegged their currencies to the dollar, China is large enough to have an impact. It is shown that its large size enables China to impede the effectiveness of U.S. macroeconomic policies. Indeed, while the U.S. is officially tagged as an independent floater, Chinese intervention is capable of interfering with dollar-euro flexibility and thereby creates outcomes that are more consistent with policy under fixed rates.
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Volume (Year): 12 (2012)
Issue (Month): 2 (June)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frankel, Jeffrey A & Wei, Shang-Jin, 2007.
"Assessing China’s Exchange Rate Regime,"
CEPR Discussion Papers
6264, C.E.P.R. Discussion Papers.
- Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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