Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China: The Consequences of Near Zero US Interest Rates

Ronald McKinnon and Zhao Liu ()
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Zhao Liu: Stanford University

No 107, Working Papers on Regional Economic Integration from Asian Development Bank

Abstract: Under near zero United States (US) interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with "hot money" inflows. Emerging market central banks intervene to prevent their currencies from rising precipitously. They subsequently lose monetary control and begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis. This cyclical inflation on the dollar’s periphery only registers in the US core consumer price index (CPI) with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic financial intermediation by banks and money market mutual funds is repressed. Because the People’s Republic of China (PRC) is forced to keep its interest rates below market-clearing levels, it also suffers from "financial repression," although in a form differing from that in the US.

Keywords: Dollar standard; carry trades; commodity price inflation (search for similar items in EconPapers)
JEL-codes: F31 F32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2013-01-01
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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Citations: View citations in EconPapers (2)

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