Does Asia's choice of exchange rate regime affect Europe's exposure to US shocks?

Bojan Markovic and Laura Povoledo

Bank of England working papers from Bank of England

Abstract: In this paper we use a stylised three-country model to analyse how the transmission of US shocks to Europe might be affected by Asia’s choice of exchange rate regime. We find that if Asia decides to peg her exchange rate to the dollar, the impact of US shocks on European output and inflation is likely to be bigger than it otherwise would have been. This happens because, without nominal exchange rate flexibility, Asian firms react to the shocks originating in the United States by implementing significant price adjustments, which in turn affect Europe’s relative competitive position. On the theoretical side, our results contribute to the literature by suggesting that the shock insulation property of floating exchange rates extends beyond the two countries that have currencies that are free to move. The transmission of shocks between two countries can also be dampened by the choice of floating exchange rates in a third country. On the practical side, we can extend our results to China, the largest Asian economy. If China did eventually decide to float her currency, Europe’s exposure to US shocks would decrease. But, our results also suggest that the overall fall in volatility of Europe’s inflation and output, following China’s floating, might be modest in size.

Date: 2007-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP318.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP318.pdf [301 Moved Permanently]--> https://www.bankofengland.co.uk/research/Documents/workingpapers/2007/WP318.pdf)

Related works:
Journal Article: Does Asias choice of exchange rate regime affect Europes exposure to US shocks? (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:318

Access Statistics for this paper

More papers in Bank of England working papers from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Digital Media Team ().