Exchange Rates and Stimulus

By Matthew Yglesias

The much-discussed question of the dollar-RMB exchange rate hasn’t actually been talked about all that frequently during my trip to China. But it did come up at our most recent meeting (admittedly only because I asked a question about it) and our host offered the predictable-but-not-unreasonable response that though there’s a sound case for gradually changing this any Chinese leader is going to have to be reluctant to take any kind of sudden measure that would be likely to throw some huge number of Chinese people out of work.

What I’d wished he’d added is that there really ought to be a way out of this dilemma, namely for revaluation to occur in the context of the U.S., Europe, and Japan committing to more expansionary measures of a monetary or fiscal (or both) nature. For whatever reason, western political leaders seem to have determined that an extended period of badly elevated unemployment is a small price to pay to head off the possibility of hypothetical future inflation. China’s leaders, more sensibly in my view, have the priorities the other way around—trying to keep an eye on inflationary pressures, but predominantly focused on the actual and present danger of labor market collapse. But it’s just really hard for China to pull this off on its own and the Chinese economy simply isn’t big enough to serve as the engine of global demand. Making life easier for China’s economic managers isn’t the reason western leaders ought to do more, but it’s certainly true that better policy in the west would give them more wiggle room in a way that ultimately would make it much easier to resolve the contentious currency issue.