Adjustment in an Open Economy with Two Exchange-Rate Regimes

Sven W. Arndt

Chapter 19 in Evolving Patterns in Global Trade and Finance, 2014, pp 275-286 from World Scientific Publishing Co. Pte. Ltd.

Abstract: 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.

Keywords: Preferential Trade Areas; Fragmentation; Cross-Border Production Networks; Off-Shoring; Currency Areas and Monetary Union; Single vs. Dual-Exchange Rate Regimes; Stabilization Policy in Open Economies; International Monetary Relations (search for similar items in EconPapers)
Date: 2014
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