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.
© 2011 Athenian Policy Forum, Inc.
Arndt, Sven W. 2011. Adjustment in an Open Economy with Two Exchange-Rate Regimes. Journal of Economic Asymmetries 8(2): 11-22.