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China, the Dollar Peg and U.S. Monetary Policy

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  • Tervala, Juha

Abstract

I examine the transmission of expansionary U.S. monetary policy in case where developing countries-including China-peg their currencies to the dollar. I evaluate the value of the dollar peg as a fraction of consumption that households would be willing to pay for the dollar peg to remain as well off under the dollar peg as under a flexible exchange rate. The value of the dollar peg is positive for the dollar bloc because the U.S. can no longer improve its terms of trade at the dollar bloc's expense. This provides a rationale for fixing the exchange rate. If the expenditure switching effect is weak, the peg is harmful to the U.S., providing a rationale for criticism of China's exchange rate policy.

Suggested Citation

  • Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:53223
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    Cited by:

    1. Liming Chen & Zhi Zhang & Ziqing Du & Lingling Deng, 2021. "Heterogeneous determinants of the exchange rate market in China with structural breaks," Applied Economics, Taylor & Francis Journals, vol. 53(59), pages 6839-6854, December.
    2. Wang, Peiwan & Zong, Lu, 2023. "Does machine learning help private sectors to alarm crises? Evidence from China’s currency market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 611(C).
    3. Donghyun Park & Irfan Qureshi & Shu Tian & Mai Lin Villaruel, 2022. "Impact of US monetary policy uncertainty on Asian exchange rates," Economic Change and Restructuring, Springer, vol. 55(1), pages 73-82, February.
    4. Chen, Liming & Du, Ziqing & Hu, Zhihao, 2020. "Impact of economic policy uncertainty on exchange rate volatility of China," Finance Research Letters, Elsevier, vol. 32(C).
    5. Willem THORBECKE, 2022. "U.S. Trade Imbalances, East Asian Exchange Rates, and a New Plaza Accord," Discussion papers 22115, Research Institute of Economy, Trade and Industry (RIETI).

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    More about this item

    Keywords

    Dollar peg; dollar bloc; monetary policy; open economy macroeconomics; beggar-thy-neighbor;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F30 - International Economics - - International Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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