Currency Pegs, Trade Deficits and Unemployment: A Reevaluation of the China Shock

48 Pages Posted: 10 Jan 2025

See all articles by Bumsoo Kim

Bumsoo Kim

Williams College

Marc de la Barrera

affiliation not provided to SSRN

Masao Fukui

Boston University

Abstract

We develop a dynamic quantitative model of trade and labor adjustment, incorporating nominal wage rigidity and consumption-savings, to study the interaction of China's currency peg and its spectacular growth, and how it affected US outcomes. Calibrating the model to trade and labor data, we show that China's currency peg accelerated the US manufacturing decline, amplified the US trade deficit, and increased unemployment, but the welfare impact of the China shock remains positive. Our counterfactuals suggest that a floating Chinese exchange rate would have mitigated these effects. We also find that China's broader savings glut contributes negligibly to US manufacturing losses, underscoring the central role of China's currency regime in shaping these outcomes.

Keywords: international trade, Labor market dynamics, Wage rigidity, exchange rate, Currency pegs, Trade imbalance, Current account, China's trade, General equilibrium

Suggested Citation

Kim, Bumsoo and de la Barrera, Marc and Fukui, Masao, Currency Pegs, Trade Deficits and Unemployment: A Reevaluation of the China Shock. Available at SSRN: https://ssrn.com/abstract=5090724 or http://dx.doi.org/10.2139/ssrn.5090724

Bumsoo Kim (Contact Author)

Williams College ( email )

Williamstown, MA 01267
United States

Marc De la Barrera

affiliation not provided to SSRN ( email )

No Address Available

Masao Fukui

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

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