Editor Pick – Does Asia’s choice of exchange rate regime affect Europe’s exposure to US shocks?
by Bojan Markovic and Laura Povoledo / Bank of England
“…if Asia decides to peg her exchange rate to the dollar, the impact of US shocks on European output and inflation is likely to be bigger than it otherwise would have been. This happens because, without nominal exchange rate flexibility, Asian firms react to the shocks originating in the United States by implementing significant price adjustments, which in turn affect Europe’s relative competitive position.”
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