Quote:
Originally posted by Not Bob
What does this have to do with whether said pegging results in an anti-free trade effect?
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Okay, let's go back to Int'l Monetary Policy 101.
In the beginning, everything was pegged to gold. Then people realized that this meant every currency was pegged to every other, and some countries started running out of gold when other countries came to them and traded excess bumpkinbucks for their gold.
So, they gave that up, and pegged to the dollar, because it was recognized as stable.
but then they realized that monetary policy had to accord with U.S. policy, lest their currency become "overpriced" and no one would want it or the goods they produce.
So people let things float freely, except for small countries with such bad monetary policies that it was better to bind themselves to US monetary policy. They recognized that this prevented them from inflating their own currency by, e.g., printing more money. But it means that they have to have fiscal and monetary discipline lest they fall into the same trap everyone did in the early 1900s
but could big countries sensibly do this? that is, peg? Sure, but then their hands are tied to the monetary policy of the peggee currency. If not, and they pursue inflationary policies, then they will have currency that is not worth as much as it purports to be domestically, exports will fall, and they won't be able to import, because who wants worthless PenskeBuks?
But, let's assume China doesn't care--how would the strategy posited by Sidd work?
To make their goods cheap, they want 1 dollar to buy more Chinese stuff. One way to do that is to say that $1 is now worth 1.5 yuan, so my dollar goes further in China now. But that would break the peg.
So what's the other approach? You deflate the currency internally, so that 1 yuan buys twice as much. But how does one accomplish this? One way is to stop printing money, or even take it out of circulation. Another is to jack up interest rates, which at least temporarily can cause deflation. but are either of those sensible strategies? Nein! Either one will stifle domestic growth in anything beyond the short run.
