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Social and Behavioral Sciences Commons™
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Full-Text Articles in Social and Behavioral Sciences
Stabilization Policy In An Economy With Two Exchange Rate Regimes, Sven W. Arndt
Stabilization Policy In An Economy With Two Exchange Rate Regimes, Sven W. Arndt
CMC Faculty Publications and Research
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 …
Adjustment In An Open Economy With Two Exchange-Rate Regimes, Sven W. Arndt
Adjustment In An Open Economy With Two Exchange-Rate Regimes, Sven W. Arndt
CMC Faculty Publications and Research
This paper examines adjustment in a model with three economies, two exchange-rate regimes, and varying capital mobility. In the benchmark scenario, the U.S. dollar fluctuates against the euro and the Chinese yuan, but capital mobility is high in the former and low in the latter case. This generates offsetting exchange-rate adjustments, which affect the efficacy of U.S. fiscal policy. In the next two scenarios, the yuan is fixed against the dollar. Rate pegging by a large country like China "interferes" with U.S. macro adjustment and undermines U.S. policy autonomy.