Asian Reserves and the Dollar: Is Gradual Adjustment Possible?

Posted: 20 Apr 2005

See all articles by Ashima Goyal

Ashima Goyal

Indira Gandhi Institute of Development Research (IGIDR)

Date Written: March 2005

Abstract

Large dollar reserves in Asian EMEs accompany large US fiscal and current account deficits. Analysis of strategic sales by Asian EMEs suggests that an attack on the dollar is not certain but is possible. A unique equilibrium where Asian EMEs sell their reserves does not exist but there are multiple Nash equilibria. Therefore action, which includes adjustment, is required to coordinate to the better equilibrium. There is evidence that more flexibility in Asian exchange rates will reduce risk for Asian EMEs, but the flexibility will have to be limited, and it depends on more flexibility in the renminbi. Moreover, limits to adjustment in wages put limits on realignments between US and Asian exchange rates. Therefore while a gradual adjustment strategy is feasible it will require both expenditure switching and expenditure reduction, with the latter moderated by the maintenance of robust global growth.

Keywords: Multiple equilibria, coordination, collective action, real wages, expenditure switching

JEL Classification: F0, F3

Suggested Citation

Goyal, Ashima, Asian Reserves and the Dollar: Is Gradual Adjustment Possible? (March 2005). Available at SSRN: https://ssrn.com/abstract=703884

Ashima Goyal (Contact Author)

Indira Gandhi Institute of Development Research (IGIDR) ( email )

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Goregaon (East)
Bombay 400065, Maharashtra
India
+91 22 28400920 (Phone)
+91 22 28402752 (Fax)

HOME PAGE: http://www.igidr.ac.in/~ashima

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