The Role of Dollar and Yuan in Remedying the Ailing International Monetary System

The emergence, as well as the persistence of global imbalances, brings out strongly the dysfunctions of the international monetary system, which undermines the smooth operation of the world economy.  In this paper, we argue that the global imbalances are essentially a macroeconomic phenomenon. Within the framework provided by national account identities, we examine the role of pertinent macroeconomic variables in USA and China. Special emphasis is given of the role of dollar-yuan exchange rate adjustment. Our analysis indicates that there is little prospect that the investment-saving gap -of both USA and China- will properly adjust so as to eliminate global imbalances and remedy the efficient functioning of the international monetary system.  Furthermore, examining the issue of dollar-yuan exchange rate adjustment, we conclude that there is no clear cut answer on its effectiveness in addressing the issue of global imbalances. Our analysis reinforces the argument that the current efforts for a new system of macroeconomic cooperation between major economic areas of the world economy should be strengthen, in order to replace the current system of macroeconomic co-dependency that has brought about global imbalances.