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JEL codes: F41, F42, F47
Abstract: World macroeconomic adjustments are usually analysed with general equilibrium model or simpler portfolio models which are not always consistent at the world level in terms of assets and consider that all the adjustments are realised through relative prices with production remaining constant. Stock flow consistent (SFC) models in the lines of Godley and Lavoie (2004) and Zhao and Lavoie (2008) are more appropriate in this perspective. Three SFC three countries models have been considered, the first one with a fixed dollar-yuan parity including a version with Chinese foreign reserves’ diversification, the second with a flexible dollar-yuan parity which can be freely floating or following a more managed regime, the third one being a generalisation of the two others with flexible prices instead of constant prices.
Several results can be outlined. The fixity of the dollar-yuan parity limits the adjustments facing shocks and world imbalances at the benefit of China and at the expense of the USA and the EU. The introduction of a diversification of China’s foreign reserves changes the adjustments mechanisms, mainly at the expense of the EU due to the dollar depreciation. In the second configuration a flexible dollar-yuan exchange rate appears as a powerful adjustment mechanism to reduce world imbalances characterised by a US deficit and a Chinese surplus. A freely floating yuan is actually unrealistic. But more managed exchange rate regimes for the dollar-yuan parity, where the Chinese Central Bank intervenes to reach a target, either on foreign reserves in dollars or on current account level, give rather similar adjustment mechanisms. Lastly, the model with flexible prices confirms the main results obtained with fixed prices.