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Currency Intervention and Consumer Welfare in an Open Economy

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  • Jin, Hailong
  • Choi, E Kwan

Abstract

This paper investigates whether China can benefit from a trade surplus (deficit) in one period and use it to pay off the debt in the next period by manipulating the exchange rates. If marginal utility of income is nonincreasing in the exchange rate, then the optimal exchange rates are the equilibrium rates that yields trade balance each period. Numerical examples using the Cobb-Douglas and CES utility functions illustrate the main proposition.

Suggested Citation

  • Jin, Hailong & Choi, E Kwan, 2014. "Currency Intervention and Consumer Welfare in an Open Economy," Staff General Research Papers Archive 37379, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:37379
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    References listed on IDEAS

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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

    currency interventioni; consumer welfare;

    JEL classification:

    • F1 - International Economics - - Trade

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