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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.

Suggested Citation

  • Luigi Bonatti & Andrea Fracasso, 2011. "Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets?," Department of Economics Working Papers 1105, Department of Economics, University of Trento, Italia.
  • Handle: RePEc:trn:utwpde:1105
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    References listed on IDEAS

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    More about this item

    Keywords

    China-US co-dependency; global imbalances; reserve accumulation; external debt;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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