Asian reserves and the dollar: Is gradual adjustment possible?

Goyal, Ashima (2005): Asian reserves and the dollar: Is gradual adjustment possible? Published in: Global Economic Journal , Vol. 5, No. 3 (2005)

Abstract

Large dollar reserves in Asian EMEs accompany large US fiscal and current account deficits. Analysis of strategic sales by Asian EMEs suggests that an attack on the dollar is not certain but is possible. A unique equilibrium where Asian EMEs sell their reserves does not exist but there are multiple Nash equilibria. Therefore action, which includes adjustment, is required to coordinate to the better equilibrium. There is evidence that more flexibility in Asian exchange rates will reduce risk for Asian EMEs, but the flexibility will have to be limited, and it depends on more flexibility in the renminbi. Moreover, limits to adjustment in wages put limits on realignments between US and Asian exchange rates. Therefore while a gradual adjustment strategy is feasible it will require both expenditure switching and expenditure reduction, with the latter moderated by the maintenance of robust global growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: multiple equilibria, coordination, collective action, real wages, expenditure switching
• Subjects: F - International Economics > F0 - General; F - International Economics > F3 - International Finance

References

Corden, W.M., 2002, Too Sensational: On the Choice of Exchange Rate Regimes, Cambridge MA: MIT Press.

Dooley, M.P., D. Folkerts-Landau, P. Garber, 2003, “An Essay on the Revived Bretton Woods System,” NBER working paper 9971.

Dooley, M.P., D. Folkerts-Landau, P. Garber, 2004, “The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest and Exchange rates in Center Countries,” NBER working paper 10332.

Eichengreen, B., 2004, “Global Imbalances and the Lessons of Bretton Woods”, NBER working paper 10497.

Goyal, A., 2005, “Traps that block global harmony,” Leaders & Letters, Financial Times, May 20.

Goyal, A. and A. Agarwal, 2005, “Risk and Asian Exchange Rate Regimes,” Global Economic Review, forthcoming, 34, 3, September.

Jones, R., H. Kierkowski, and C. Lurong, 2004, “What does the Evidence Tell us about Fragmentation and Outsourcing,” International Review of Economics and Finance, forthcoming.

Hennings, R.C, 2004, “The Exchange Rate Weapon, Macroeconomic Conflict, and the Changing Structure of the Global Economy,” presented at the Workshop on International Monetary Power, EU Center of California, Scripps College, Claremont, November 19. Available at http://www.eucenter.scrippscollege.edu/eu_events/Monetary_Conference/Henning_paper.pdf

IMF (International Monetary Fund), International Financial Statistics, various issues.

Obstfeld, M. and K. Rogoff, 2004, “The Unsustainable U.S. Current Account Position Revisited,” NBER working paper 10869.

Peterson, P.G., 2004, Running on Empty, New York: Farrar, Straus and Giroux

UN (United Nations), 2004, UN Comtrade Database.

Woolfolk, M, 2004, “US job losses and budget deficit are caused by the exchange rate inflexibility of Asian countries,” Leaders & Letters, Financial Times, October 25, pp.12.

Willett, T. W., 2004, “No single theoretical model of international monetary relationships should be dominant”, Leaders & Letters, Financial Times, October 28.