Abstract
AbstractThis paper uses a three‐country stylized model of the United States, the euro area and Asia to analyse alternative policy responses to an exogenous depreciation of the US dollar. It is assumed that the Asian authorities respond by maintaining their peg to the dollar, while the European Central Bank (ECB) can either maintain its monetary policy stance or attempt to stabilize the euro's exchange rate. Using simulations, we find that in many cases, it is not optimal for the ECB to try to offset euro appreciation. The basic results are driven by the degree of substitutability among US, euro area and Asian goods, and the degree of product market competition within each market.
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