Dollar Standard And The Stability Of China's Macro-economy

Since middle periods of the20th century, America continuously adopt the quantitative easing monetary policy to stimulate economic development and a lot of dollars are printed, used for large purchases of goods from other countries. At first, peripheral countries represented by China are very satisfied with this kind of export-oriented economic development strategy which leads to rapid growth of trade surplus, gross domestic product and the household income. However, in recent years, more and more peripheral countries are aware of the dollar standard huge negative impacts, especially for China. Based on the research of Gali (2005) and Tervala (2010), this paper builds new Keynesian DSGE model including Dollar Standard with the open conditions. In order to analyze the influence of different economic shock and the degree change of Dollar Standard to the volatility of macroeconomic variables and the welfare loss, Monte Carlo Random Simulation are carried out using MATLAB software in this paper. The full text develops around three questions,The first question is whether Dollar Standard will aggravate the instability of China's macro economy? Both random numerical simulation and empirical research show that Dollar Standard has a significant adverse impact on China's macro economic instability. In sum, it can get the following three conclusions. Firstly, Dollar Standard would not affect China's c macro economic cycle. As the change of degree of dollar standard, China's economic growth recession period will not reverse. The economic cycle is mainly affected by types of economic shocks. Secondly, the degree of the dollar standard will directly affect the degree of fluctuation of macroeconomic variables. The dollar standard will increase the volatility of China's gross domestic product, prices and exchange rate. When the technology shock is in the dominant, the rising of dollar standard degree can lead to more price fluctuations. When the monetary shock is in the dominant, the rising of dollar standard degree will lead to more exchange rate fluctuations and overshooting. Thirdly, China welfare loss depends on both the degree of Dollar Standard and the kind of economic shock. Dollar Standard will stimulate the U.S. to adopt expansionary monetary policy so that the increase of aggregate demand lead to the increase of China's output which will improve the level of Chinese residents' income and consumption. When the positive effect of increase in consumption outweighs the negative effect of increase in labour, Chinese residents can get positive welfare increase. However, when the positive effect of increase in consumption is less than the negative effect of increase in labour, Chinese residents can get positive welfare increase. If the technology shock is in the dominant, there is the optimal level of dollar standard makes Chinese residents total welfare loss is minimal. If the other economic shock is in the dominant, the reducing of dollar standard will be able to increase the Chinese total benefits. Totally speaking, Dollar standard exacerbate China's macro economic instability, the U.S. economic shocks make Chinese residents welfare losses increase, and the negative influence of monetary policy shocks should be greater than the shock of the real economy.The second question is which channels Dollar standard can influence China's macro economic instability. To sum up, Dollar Standard influences the China's macroeconomic instability through the two aspects. On the one hand, Dollar Standard increases the frequency of economic shocks which lead to the appearing of international financial risk. Under the Dollar Standard, America household' welfare is improved depending on the printing of dollars so as to increase the frequency of economic shocks. The economic shocks lead to the more frequently of the financial risk which leads to more instability of peripheral countries. On the other hand, Dollar Standard influences the macroeconomic stability of peripheral countries by affect the international goods market and the international financial market risk sharing mechanism. Dollar standard leads to the asymmetry of risk sharing mechanism between America and China. America's commodity market risk and financial market risk can be passed to the Chinese market through the exchange rate mechanism effectively. While China's commodity market risk and financial risk has dispersed mechanism to the United States. In order to meet economic fundamental equilibrium, the domestic macroeconomic will have excessive adjustments and excessive volatility. In summing, the influence transmission channels of Dollar standard on China's macro economic instability include international asset prices channel, international channels of interest rate and exchange rate channel. In international asset prices channel, the expansionary monetary policy cause a decline in U.S. interest rates, making stocks and bonds and other asset prices rise. China's stocks and bonds and other asset prices will rise through the international financial market which will lead to China's macro economic instability. In international interest channel, the expansionary monetary policy cause a decline in U.S. interest rates, making capital flow to the Chinese market which will promote China's interest rates rise. It will make the investment and output volatility rises and finally make China's macroeconomic instability. In international exchange rate channel, when the increase in the money supply leads to lower interest rates, the RMB exchange rate will rise. Due to the influence of Dollar Standard, China's goods exporting to the United States use local currency pricing so that exchange rate has the incomplete and asymmetric transfer effect which makes the failure of China's adjustment of international balance of payments influenced by appreciation of the RMB and China's macro economy more volatility.The third question is what measures China should take to reduce the impact of Dollar Standard on macroeconomic instability. China should reduce the frequency of the U.S. economic shocks and the effectiveness of China economic risk dispersed mechanism to the United States. Firstly, it needs to increase the ratio of RMB in the international price and clearing so as to enhance the level of RMB internationalization. It is good for China's export firms to adopt more flexible pricing strategy so as to improve the effectiveness of China economic risk diversification to the United States. Secondly, it is beneficial to reducing the negative impact of the dollar standard by improving China's export manufacturer bargaining power. Chinese export companies should avoid vicious competition and actively strengthen cooperation so as to improve overall external bargaining power. It can improve the effectiveness of China economic risk diversification to the United States, but not all handled by the domestic market. In addition, it also needs to make full use of the international coordination mechanism of monetary policy. It can limit United States to producing economic shock and reduce the U.S. quantitative easing monetary policy which are good for improve the residents' welfare. Finally, it needs to promote market-oriented reform of China's financial markets and improve the domestic financial market risk sharing mechanism as a supplement for international risk sharing mechanism. Especially, it should take the development of multi-level capital market which provides trading places for different traders in order to spread the risk to the greatest extent.