SEMINAR SERIES No. 16/1314
Unemployment and Optimal Currency Intervention
in an Open Economy
Prof. E. Kwan Choi
Professor of Economics
Iowa State University
This paper investigates whether China with unemployed resources can benefit from a trade surplus in one period and a deficit in the next by manipulating the exchange rates. A country may be tempted to stimulate its economy temporarily by devaluation, but any surplus so generated subsequently must be used up with inescapable reverse output effect. It is shown that under reasonable conditions non-intervention is the optimal policy and the optimal exchange rates are the equilibrium rates that yield a trade balance each period. Numerical examples using the Cobb-Douglas utility function illustrate the main proposition.
Date: June 23, 2014 (Monday)
A Short Biography of Prof. E Kwan Choi
Prof. Choi is from the Department of Economics, Iowa State University. His research interests include economic development and international economics (trade and finance). As one of leading scholars in these fields, he now serves as associate or managing editors for several journals such asInternational Review of Economics and Finance, Japanese Economic Review, and Review of Development Economics.