Debt-deflation Traps Within Small Open Economies: A Stock-flow Consistent Perspective

Abstract

World macroeconomic adjustments are analysed with a three-country Stock-Flow Consistent (SFC) models. Three SFC models are considered, the first one with a fixed dollar–yuan parity including a version with Chinese foreign reserves’ diversification, the second with a flexible dollar–yuan parity which can be freely floating or following a more managed float, the third one being a generalization of the two others with flexible prices instead of constant prices. The fixity of the dollar–yuan parity limits the adjustments facing shocks and world imbalances while a more flexible dollar–yuan exchange rate appears as a powerful adjustment mechanism to reduce these imbalances.