Thinking Outside the Currency Peg Box

By Matthew Yglesias

You can’t talk China and the economy without talking about the exchange rate issue. And thinking about it has got me pondering some questions. For example, insofar as the Chinese want to insist on pegging their currency why do they have to do it in this way? My understanding is that the peg doesn’t just operate automatically. It needs to be defended with a combination of capital controls and active measures. Specifically, the Chinese government spends a ton of money every year buying up U.S. financial assets. But couldn’t they just buy something else? They could order planes from Boeing and sink them into the ocean—that would accomplish everything the Chinese want to accomplish, but also create jobs.

Of course they’d look a bit silly in the eyes of the world if they did that. But what if they held a lottery and gave the winning families all expenses paid vacations to the United States? People would enjoy that, it seems to me. And wouldn’t it work just as well in terms of maintaining the competitiveness of Chinese exports?