Social and Behavioral Sciences Commons^™

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 …