The paper introduces an innovative graph for presenting bilateral exchange rates. The currency quantities are on the axes and the exchange rate is the ratio between them, i.e., the slope of a ray from the origin. Behavior is captured by currency offer curves. The paper uses the model to address the issues surrounding China’s export-led growth strategy, i.e., its policy of undervaluing the yuan.
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Suppose the currency market behavioral assumptions can be captured by iso-elastic demand functions. Consider first agents holding dollars who want to trade them for yuan. Assume a demand function
where m is the price elasticity, and recall the exchange rate identity, repeating Eq. 3 from the text
and simplifying yields
Similarly, for agents holding yuan, the demand function
and the exchange rate identity yield
The equilibrium condition is so that
which simplifies to
The quantities, which this approach is designed to highlight, are
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Highfill, J., Wojcikewych, R. The U.S.-China Exchange Rate Debate: Using Currency Offer Curves. Int Adv Econ Res 17, 386–396 (2011). https://doi.org/10.1007/s11294-011-9325-0
- Exchange rates
- United States
- Export-led growth