【正文】 ? Dollar is the key currency: most trade is invoiced in dollars with “pricing to market” ? . price level is stable with relative PPP ? Wage bargaining ? Bidding for workers in tradables constrained by the fixed exchange rate. ? Money wage growth reflects ongoing productivity change in the tradables sector ? Wages then grow similarly in other sectors ? Compare Japan 1949 1971 to China 1994 2022 Table 1: Key economic indicators for Japan and the . under a fixed yen/dollar exchange rate, 19501971 Wholesale prices Money wages Consumer prices Industrial production . Japan . Japan . Japan . Japan Real GDP Nominal GDP Narrow money Labor productivity . Japan . Japan . Japan . Japan a 19521971. b 19531971. c 19511971. (average annual percent change) Figure 1: Nominal Manufacturing Wage Growth for US and Japan: 1950 – 1971 1002003004005006007008001950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971J apanU SAFigure 2: Inflation and Wage Differentials between Japan and US, and Yen/Dollar Rate 10 %5%0%5%10%15%20%195019531956195919621965196819711974197719801983198619891992199519982001percent2060140220300380yen/dollarwag e dif f erentialin f latio n dif f erentialy en /d o llarIndeterminant Wage Bargaining in the SM with a Floating Exchange Rate ? When the exchange rate fluctuates: ? Relative PPP will not hold continuously ? Exchange rate no longer anchors the domestic price level to world inflation. ? Need for an independent national (demandside) moary policy. ? Money wage bargaining over productivity gains now is in limbo. Bargainers cannot judge the course of domestic inflation relative to movements in the exchange rate. ? The tradables sector need no longer be the leading sector for wage determination. Table 2: Key economic indicators for China and the . under a fixed yuan/dollar exchange rate, 19942022 Wholesale prices Money wages (Mfg) Consumer prices Industrial production . China . China . China . China Real GDP Nominal GDP Narrow money Labor productivity . China . China . China . China a Exfactory price index. b 2022 data on manufacturing wages is projected from overall average wages from 19972022. c 19942022. d 19942022. Zhang and Tan e 19942022. R. Fernholz (average annual rates of change) Figure 3: Nominal Manufacturing Wage Growth for US and China: 1994 – 2022 1001502002503003501994 1995 1996 1997 1998 1999 2022 2022 2022 2022C hinaU SAFigure 4: China: Nominal Wages Across Different Sectors: 1994 – 2022 1001201401601802002202402602803001994 1995 1996 1997 1998 1999 2022 2022 2022F arm Mi ne Mf g E l ec G asCons t T r an sReta i l S oc S erv Reconsidering the Scandinavian Model: A Summary Relative PPP Wage Bargaining Process Money Wage Growth Fixed Dollar Exchange Rate Yes Determinant Reflects productivity growth in tradables Floating Exchange Rate No Indeterminant ? Conclusions for East Asia ? Mutual exchange stability is a public good among integrated economies. ? Because an “Asian euro” is but a distant possibility, keying on the dollar is the only feasible way for securing intraEast Asian exchange stability and pricelevel alignment. ? Collective dollar pegging enlarges the zone of stable dollar prices far beyond trade with the United States: stronger mutual anchoring of national price levels ? East Asian governments do not have welldefined portfolio targets for “optimizing” their stocks of dollar reserves. ? When forced to run (collective) balance of payments surpluses by . deficits, indefinite reserve accumulation bees residual to exchange rate targeting. Conclusions for the . ? The . must take measures to increase private saving and reduce the fiscal deficit of the federal government. ? The . Federal Reserve Bank should tighten moary policy to alleviate dollar weakness. ? But such adjustments must be gradual to avoid a downturn in the world economy. ? Depreciating the dollar will not correct the current account deficit, but will threaten a surge of inflation in the United States itself. Conclusions for China ? A credibly fixed yuan/dollar exchange rate balances international petitiveness by ? anchoring China’s domestic price level, and ? inducing growth in money wages to match differential labor productivity growth between China and the . ? helping secure exchange stability in neighboring countries. ? Exchange rate fluctuations disrupt international adjustment in money wage growth— as in the earlier Japanese experience. ? Foreign pressure on China to appreciate or float the Renminbi is misguided. ? But a slightly wider band of variation around yuan/dollar, say, 2 percent, would help devolve the clearing of international payments from the PBC to mercial banks.