Job Market Paper
(joint with Marc de la Barrera and Masao Fukui)
Abstract: We study how the interaction between China’s productivity growth and currency peg to the US dollar affected manufacturing decline, unemployment, trade deficit and overall welfare in the United States. Empirically, we document that in response to similar surges in Chinese exports, countries pegging to the US dollar experienced larger unemployment and trade deficits compared to floating countries. Theoretically, we develop a dynamic model of trade featuring endogenous imbalances and nominal rigidity that is consistent with the previous evidence. We show that Foreign growth may hurt Home welfare and characterize optimal trade and monetary policy in this environment. Quantitatively, we find that China’s currency peg is responsible for 447 thousand manufacturing jobs lost in the US over 2000- 2012, 1.3% (% GDP) of the US trade deficit in the same period, and reduces US lifetime welfare gains from Chinese growth by 32% compared to an economy where an otherwise identically growing China had its currency floating, though the welfare impact of the China shock remains positive. We find that a short-run safeguard tariff may have been effective in accomodating China’s currency peg and ameliorating the labor market distortions.