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Currency intervention and consumer welfare in an open economy

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  • Choi, E. Kwan
  • Jin, Hailong

Abstract

This paper investigates whether China can benefit from a trade surplus in one period, using it to pay off the debt in the next period by manipulating the exchange rates. If the marginal utility of income is nonincreasing in the exchange rate, then the equilibrium exchange rates that yield a trade balance in each period maximize the total utility over two periods, regardless of the interest rate. Numerical examples using the Cobb–Douglas and CES utility functions illustrate the main proposition.

Suggested Citation

  • Choi, E. Kwan & Jin, Hailong, 2014. "Currency intervention and consumer welfare in an open economy," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 47-56.
    • Handle: RePEc:eee:reveco:v:29:y:2014:i:c:p:47-56
    DOI: 10.1016/j.iref.2013.04.005
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    1. Dilip K. Ghosh & Augustine C. Arize, 2003. "Profit Possibilities in Currency Markets: Arbitrage, Hedging, and Speculation," The Financial Review, Eastern Finance Association, vol. 38(3), pages 473-496, August.
    2. Ghosh, Dilip K, 1997. "Profit Multiplier in Covered Currency Trading with Leverage," The Financial Review, Eastern Finance Association, vol. 32(2), pages 391-409, May.
    3. Yin-Wong Cheung, 2012. "Exchange Rate Misalignment - The Case of the Chinese Renminbi," CESifo Working Paper Series 3797, CESifo.
    4. Jin, Hailong & Choi, E. Kwan, 2013. "Profits and losses from currency intervention," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 14-20.
    5. Thorvaldur Gylfason & Michael Schmid, 1983. "Does Devaluation Cause Stagflation?," Canadian Journal of Economics, Canadian Economics Association, vol. 16(4), pages 641-654, November.
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    More about this item

    Keywords

    Yuan–dollar exchange rate; Currency intervention;

    JEL classification:

    • F1 - International Economics - - Trade

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