Chinese reserves accumulation and US monetary policy: Will China go on buying US financial assets?

Luigi Bonatti () and Andrea Fracasso

No 1105, Department of Economics Working Papers from Department of Economics, University of Trento, Italia

Abstract: It has been argued that China may stop financing the US external deficit, appreciate the currency, increase consumption and move its economy away from tradables and towards nontradables. Our two-country model shows that paradoxically this policy option is unattractive if the US authorities keep monetary policy sufficiently loose, thus reducing the real value of the US liabilities held by China. As long as the American and Chinese authorities pursue complementary objectives, the current China-US arrangement continues. In addition, an untimely appreciation of China�s real exchange rate may have negative consequences on employment in the US and in China.

Keywords: China-US co-dependency; global imbalances; reserve accumulation; external debt (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ifn, nep-mon and nep-opm
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