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Monetary policy and trade imbalance adjustment

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  • Zhigang Huang

Abstract

The paper sets up a small open economy general equilibrium model to study the dynamics of the adjustment of trade imbalances under different policies based on the Chinese economy. The policies that adjust domestic prices require a long period to achieve trade balance and induce fluctuations of output and inflation, regardless of whether capital markets are open or closed, while policies that adjust the exchange rate quickly result in diminished trade surpluses, and do not cause fluctuations of output and inflation. However, policies that adjust the exchange rate slowly also lead to fluctuations under a capital flow setting. Nominal frictions are important factors to these differences, because they slow down the price adjustment, but do not bother the exchange rate changes. From the perspective of welfare, fast exchange rate adjustment policies are better than price policies, and adjustment under capital flow is better than adjustment under capital control. The implications for China's trade surplus are analyzed.

Suggested Citation

  • Zhigang Huang, 2010. "Monetary policy and trade imbalance adjustment," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 8(3), pages 269-292.
    • Handle: RePEc:taf:jocebs:v:8:y:2010:i:3:p:269-292
    DOI: 10.1080/14765284.2010.493641
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    Cited by:

    1. Thanh, Su Dinh & Canh, Nguyen Phuc & Doytch, Nadia, 2020. "Asymmetric effects of U.S. monetary policy on the U.S. bilateral trade deficit with China: A Markov switching ARDL model approach," The Journal of Economic Asymmetries, Elsevier, vol. 22(C).
    2. Dai, Meixing, 2011. "Motivations and strategies for a real revaluation of the Yuan," MPRA Paper 30440, University Library of Munich, Germany.
    3. Meixing Dai, 2013. "In search of an optimal strategy for yuan’s real revaluation," Journal of Chinese Economic and Business Studies, Taylor & Francis Journals, vol. 11(1), pages 29-46, February.

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