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Asian Reserves and the Dollar: Is Gradual Adjustment Possible?

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  • Goyal Ashima

    (Indira Gandhi Institute of Development Research)

Abstract

Large dollar reserves in Asian EMEs accompany large U.S. 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.

Suggested Citation

  • Goyal Ashima, 2005. "Asian Reserves and the Dollar: Is Gradual Adjustment Possible?," Global Economy Journal, De Gruyter, vol. 5(3), pages 1-26, September.
    • Handle: RePEc:bpj:glecon:v:5:y:2005:i:3:n:3
    DOI: 10.2202/1524-5861.1083
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    1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The revived Bretton Woods system," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 307-313.
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    3. Ashima Goyal & Ankita Agarwal, 2005. "Risk and Asian Exchange Rate Regimes," Global Economic Review, Taylor & Francis Journals, vol. 34(3), pages 321-329.
    4. Michael P. Dooley & David Folkerts-Landau & Peter M. Garber, 2005. "An essay on the revived Bretton Woods system," Proceedings, Federal Reserve Bank of San Francisco, issue Feb.
    5. Ronald Jones; Henryk Kierzkowski; Chen Lurong, 2004. "What does the evidence tell us about fragmentation and outsourcing," IHEID Working Papers 09-2004, Economics Section, The Graduate Institute of International Studies.
    6. Barry Eichengreen, 2010. "Global Imbalances and the Lessons of Bretton Woods," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262514141, April.
    7. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2004. "The Revived Bretton Woods System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries," NBER Working Papers 10332, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Ashima Goyal, 2013. "Assessing Changes in the Global Financial Architecture from an Emerging Market Perspective," Foreign Trade Review, , vol. 48(4), pages 461-480, November.
    2. Ashima Goyal & Ankita Agarwal, 2005. "Risk and Asian Exchange Rate Regimes," Global Economic Review, Taylor & Francis Journals, vol. 34(3), pages 321-329.
    3. Ashima Goyal, 2010. "Global Financial Architecture," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 4(2), pages 225-239, May.

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    More about this item

    Keywords

    multiple equilibria; coordination; collective action; real wages; expenditure switching;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • F3 - International Economics - - International Finance

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