Trade Liberalisation and China's Monetary Policy Choices:An Analysis from the Dominant Currency Paradigm
In the context of increased tariffs imposed by the United States,this paper,based on the Dominant Currency Paradigm(DCP)with a more solid micro-foundation,constructs an open economy model including China,the United States,and the European Union to explore the transmission of shocks,monetary policy choices,and welfare losses under different tariff levels.Through comparisons of heterogeneous productivity shocks and policy rate shocks,as well as welfare analysis under six typical scenarios of tariff changes,the following conclusions are drawn:Firstly,productivity shocks in each country mainly affect domestic economic fluctuations but also have certain spillover effects on foreign economies.As the dominant currency country,the United States'monetary policy signifi-cantly influences economic fluctuations in non-dominant currency countries,while the im-pact of the European Union as a non-dominant currency country is relatively small.Secondly,changes in tariff levels also require adjustments in the monetary policy used by China.For China,when there is a significant productivity shock in the United States,if China reduces tariff levels with other countries,it should increase the intensity of monetary policy adjustments to the economy.Finally,under different tariff levels,welfare losses from economic fluctuations vary.When domestic shocks are the main source of fluctuations and China faces tariffs imposed by the United States,implementing retaliatory measures against US tariffs can reduce welfare losses.When foreign shocks are the main source of fluctuations and China faces tariffs imposed by the United States,promoting tariff reduc-tions with other countries can also reduce welfare losses.
Monetary PolicyTariffDominant Currency ParadigmWelfare AnalysisThree-country Model
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