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Unemployment and optimal currency intervention in an open economy

Author

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  • Jin, Hailong
  • Choi, Yoonho
  • Kwan Choi, E.

Abstract

This paper investigates whether China, with unemployed resources, can benefit from a trade surplus in one period and a deficit in the next by manipulating the yuan's peg. A country may be tempted to stimulate its economy temporarily by devaluation, but any surplus so generated subsequently must be expended with inescapable reverse output effect. It is shown that under reasonable conditions, nonintervention is the optimal policy and the optimal exchange rates are the equilibrium rates that yield a trade balance in each period. Numerical examples using the Cobb–Douglas utility function illustrate the main proposition.

Suggested Citation

  • Jin, Hailong & Choi, Yoonho & Kwan Choi, E., 2016. "Unemployment and optimal currency intervention in an open economy," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 253-261.
    • Handle: RePEc:eee:reveco:v:41:y:2016:i:c:p:253-261
    DOI: 10.1016/j.iref.2015.08.008
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    References listed on IDEAS

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    Cited by:

    1. Choi, Yoonho & Choi, E. Kwan, 2018. "Unemployment and optimal exchange rate in an open economy," Economic Modelling, Elsevier, vol. 69(C), pages 82-90.

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    More about this item

    Keywords

    Unemployment; Currency intervention; Optimal exchange rate;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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