TITLE:
The Strategic Interaction between US and China on Safe Asset Issuance
AUTHORS:
Rongyu Wang
KEYWORDS:
Dollar, Renminbi, International Monetary System, International Price System, Mixture of Strategic Substitutes and Strategic Complements, Devaluation Costs, China, US
JOURNAL NAME:
Theoretical Economics Letters,
Vol.14 No.4,
July
15,
2024
ABSTRACT: I study the strategic interaction between US and China in the international monetary system and international price system from the Western perspective. Their behavior differs due to the different structures of their devaluation costs. The structure of devaluation costs of US determines that it exhibits strategic complements while the structure of devaluation costs of China determines that it exhibits strategic substitutes. It is also found that the asymmetry between the safe asset issuance of US and China at present can be explained by the devaluation costs and the probability that both countries experience disaster states. A general principle found in this paper is that what the US does hurting (benefiting) itself benefits (hurts) China, while what China does hurting (benefiting) itself hurts (benefits) US. Therefore, subject to the devaluation cost structure proposed in the model, the attempt to replace USD with RMB is not beneficial to China.