Since the early 2000s, China's central bank has been intervening actively in the foreign exchange markets to prevent sharp appreciation of the Chinese currency. At the same time, it issues central bank bills, a type of short-term central bank debt, to absorb the increase of bank reserves caused...

We characterize the dilemma of one currency area: the common currency’s value is overvalued for regions with poor fundamentals, which hampers export. With labour market rigidity, they cannot reduce labour costs to restore its growth, leading to further reduction of exports. Using Chinese...