Modeling global financial imbalances and exchange rate regimes.

Summary Global macroeconomic adjustments are analyzed first through the stylized facts and causes of global imbalances and then using a three-country "stock-flow consistent" model in the tradition of Godley and Lavoie (2007) and Zhao and Lavoie (2010). Three models are considered. The first one, with fixed prices, three zones with a debt in domestic currency, with a fixed dollar-yuan parity, but which can also include a diversification behavior of the Chinese Central Bank and a flexible dollar-yuan parity according to a pure floating regime or a more administered regime. The second is a generalization of the previous one with flexible prices instead of fixed prices. The third, with fixed prices, with four zones and with the rest of the world's debt in dollars, includes a peg of the rest of the world's currency and the yuan to the dollar and three pegging scenarios to a basket of currencies. In the face of shocks, the fixity of the yuan-dollar parity limits the reduction of global imbalances to China's benefit. A diversification of Chinese foreign exchange reserves modifies the nature of the adjustments, especially to the detriment of the euro zone because of the resulting depreciation of the dollar. The flexibility of the dollar-yuan parity, on the other hand, appears to be an effective means of reducing imbalances in all three models. While a pure floating of the yuan seems unrealistic in the current context, a more managed exchange rate regime for the yuan-dollar parity produces fairly similar adjustment mechanisms. Finally, the model with flexible prices confirms the main results obtained previously.