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The "Great Moderation" in a Dual Exchange Rate Regime


  • Arndt Sven W.

    () (Claremont McKenna College)


In the early nineties, the U.S. economy was emerging from a brief slump, monetary policy was easy, and economic activity recovered quickly during the decade, with GDP eventually reaching and then passing the consensus full employment level. Yet aggregate inflation remained surprisingly subdued. This moderation in prices at the aggregate level persuaded policy makers to allow the easy-money stance to continue in spite of the presence of inflation in non-tradables and in housing and construction in particular. This paper uses a flex-price, mixed-exchange rate model to examine some of the major contributing factors to economic developments in the two-decade period that ended in the financial meltdown and the great recession. It argues that Chinese exchange rate manipulation and China's preference for holding dollar reserves were important contributing factors. On the U.S. side, failure to understand the importance of differencial inflation patterns in tradables and non-tradables sectors, and especially failure to see inflation in housing and construction as goods rather than asset inflation, allowed monetary expansion to last much longer than it should have.

Suggested Citation

  • Arndt Sven W., 2012. "The "Great Moderation" in a Dual Exchange Rate Regime," Global Economy Journal, De Gruyter, vol. 12(4), pages 1-12, December.
  • Handle: RePEc:bpj:glecon:v:12:y:2012:i:4:p:1-12:n:6

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    References listed on IDEAS

    1. Claudio Borio, 2011. "Rediscovering the Macroeconomic Roots of Financial Stability Policy: Journey, Challenges, and a Way Forward," Annual Review of Financial Economics, Annual Reviews, vol. 3(1), pages 87-117, December.
    2. repec:eee:joecas:v:8:y:2011:i:2:p:11-22 is not listed on IDEAS
    3. Jeffrey A. Frankel & Shang-Jin Wei, 2007. "Assessing China's exchange rate regime," Economic Policy, CEPR;CES;MSH, vol. 22, pages 575-627, July.
    4. Obstfeld, Maurice & Rogoff, Kenneth, 2009. "Global imbalances and the financial crisis: products of common causes," Proceedings, Federal Reserve Bank of San Francisco, issue Oct, pages 131-172.
    5. Ben S. Bernanke, 2005. "The global saving glut and the U.S. current account deficit," Speech 77, Board of Governors of the Federal Reserve System (U.S.).
    6. David Andolfatto, 2012. "Liquidity shocks, real interest rates, and global imbalances," Review, Federal Reserve Bank of St. Louis, issue May, pages 187-196.
    7. repec:fip:fedgsq:y:2005:i:mar10 is not listed on IDEAS
    8. 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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