Juha Tervala: China, the Dollar Peg and U.S. Monetary Policy

Tiistai
9.10.2012
klo. 10.30

Juha Tervala (University of Helsinki): China, the Dollar Peg and U.S. Monetary Policy

Abstract
In this paper, I examine the international transmission of expansionary U.S. monetary policy in case where developing countries - including China - peg their currencies to the dollar. More important, 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 to the dollar. If the expenditure switching effect is relatively weak, the dollar peg is harmful to the U.S., thus providing a rationale for criticism of China's exchange rate policy.

Keywords: Dollar peg, dollar bloc, monetary policy, open economy, macroeconomics, beggar-thy-neighbour
JEL classification: E32, E52, F30, F41, F44

 

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