Center for Pacific Basin Studies

The Center for Pacific Basin Studies promotes cooperation among central banks in the Pacific Basin and provide insight into and analysis of economic policy issues affecting the region.

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Pacific Basin Notes

Occasional series of the FRBSF Economic Letter

China’s Exchange Rate Policies and U.S. Financial Markets

2017-28

Thomas M. Mertens and Patrick Shultz | October 2, 2017

Exchange rate stabilization or currency “pegs” are among the most prevalent interventions in international financial markets. Removing a peg to a safer currency can make the home currency more risky and less attractive to investors. When a country with market influence removes its peg from a safer country, the risk associated with holding either currency can be affected. Analyzing the effects of a scenario that changes a peg of the renminbi from the U.S. dollar to a basket of currencies suggests that China’s interest rates increase while U.S. interest rates decrease.

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Working Papers

Interest-Rate Liberalization and Capital Misallocations

FRBSF Working Paper 2017-15

Liu • Wang • Xu | July 2017

We study the consequences of interest-rate liberalization in a two-sector general equilibrium model of China. The model captures a key feature of China's distorted financial system: state-owned enterprises (SOEs) have greater incentive to expand production and easier access to credit than private firms. In this second-best environment, liberalizing interest rate controls improves capital allocations within each sector, but exacerbates misallocations across sectors. Under calibrated parameters, interest-rate liberalization may reduce aggregate productivity and welfare, unless other policy reforms are also implemented to alleviate SOEs' distorted incentives or improve private firms' credit access.

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Conferences

2017 Asia Economic Policy Conference

November 16 - November 17, 2017
Center for Pacific Basin Studies, Federal Reserve Bank of San Francisco | San Francisco, California

Conference organizers invite research paper submissions by March 15 along the theme of “Monetary Policy Challenges in a Changing Global Environment.”

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