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Unemployment and optimal currency intervention in an open economy

Author

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  • 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
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    References listed on IDEAS

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    1. 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.
    2. Hailong Jin & E. Kwan Choi, 2013. "China's Profits and Losses from Currency Intervention, 1994-2011," CESifo Working Paper Series 4551, CESifo Group Munich.
    3. 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.
    4. 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.
    5. 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.
    6. John T. Cuddington, 1981. "Import Substitution Policies: A Two-Sector, Fix-Price Model," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 327-342.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. Hamid Beladi & Reza Oladi, 2014. "On Offshoring and Trade Deficit," Review of Development Economics, Wiley Blackwell, vol. 18(3), pages 517-523, August.
    13. Yin-Wong Cheung, 2012. "Exchange Rate Misalignment - The Case of the Chinese Renminbi," CESifo Working Paper Series 3797, CESifo Group Munich.
    14. Jin, Hailong & Choi, E. Kwan, 2013. "Profits and losses from currency intervention," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 14-20.
    15. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-654, November.
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    1. repec:eee:ecmode:v:69:y:2018:i:c:p:82-90 is not listed on IDEAS

    More about this item

    Keywords

    Unemployment; Currency intervention; Optimal exchange rate;

    JEL classification:

    • F1 - International Economics - - Trade

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