Impact of foreign exchange policies of Asian countries on the world economy

Abstract

Over the recent years, a prominent issue of global imbalances has centered upon increasingly large current account surpluses in emerging and developing Asia, corresponding to a huge deficit in the United States (US). The US government and economists have criticized China for keeping its currency value low or undervalued as part of its export-led growth strategy, being widely adopted by Asian countries. Bergsten (2006) also criticizes that other Asian countries have a tendency to intervene in currency markets in order to keep their currencies weak against the dollar to stay competitive with Chinese goods. Thus, this paper aims to investigate whether the Asian region, in particular China, can help global current account rebalancing through their exchange rate appreciation by using a global macroeconomic model, namely CAM, originated by Cripps and Godley (1978). More specifically, does the real exchange rate appreciation of a group of Asian currencies have a significant impact on reducing their own trade surplus, and improving the US trade deficit? From simulation results, real appreciation of Chinese yuan improves not only the US trade deficit, but also enhances trade balances for Europe and Japan as well as other selected Asian countries. Moreover, it is evident that a reduction in China’s trade surplus due to the yuan appreciation would be amplified if there was an expansionary policy in China, especially through government spending. In addition, although joint appreciation among Asian countries is absolutely better than unilateral appreciation of individual Asian real exchange rates, such a regional realignment would not occur unless there was explicit agreement between the participants regarding the purpose.