Paul Krugman: We’re Not China

In the New York Times, Paul Krugman argues against comparisons between Europe’s complaints about a weak dollar and U.S. complaints about an undervalued yuan:

What the United States is doing is an expansionary monetary policy in the face of a depressed economy and threats of deflation; what else do you expect us to do? Now, one effect of that policy, if it isn’t matched abroad, is a weaker dollar — but that’s not the goal of the policy.

Beyond that, the overall effect of quantitative easing in America is expansionary for the world economy as a whole: expansionary in the United States, and ambiguous for the rest of the world. (It’s ambiguous because there are two effects: the weaker dollar tends to reduce the US trade deficit, but a stronger US economy tends to increase the deficit, with the net effect uncertain.)

Now compare this with China’s situation. China isn’t fighting deflation — it’s fighting inflation, so the undervaluation of the yuan has to be accompanied by restrictive credit policies domestically. (China can separate exchange rate policy from domestic monetary policy because it has capital controls). The overall effect of the policy is therefore to reduce, not increase, world demand — and the effect on foreign economies is clearly negative.

The policies, then, aren’t at all equivalent.

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