United States Domestic Macroeconomic Policies, Dollar Overvaluation, and their Effects on the US Economy and the Rest of the World
In this chapter and the three that follow an attempt is made to apply some of the analysis that has been assembled in earlier parts of the book. The list of case-studies selected here is, however, by no means comprehensive and there are numerous other examples that could be used to bring the analysis to life. Indeed, if it is to be of practical use the analysis should be capable of providing insights into the causes and consequences of most macroeconomic phenomena that affect the open economy and the world economy.
KeywordsExchange Rate Interest Rate Monetary Policy Current Account Fiscal Policy
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Notes and References
- 1.The temptation to include numerous tables of data to support the claims made here has been resisted. Those interested may consult, for example, the IMF’s World Economic Outlook, which contains relevant information on fiscal and monetary policy across a range of industrial countries in a fairly accessible form.Google Scholar
- 2.In an attempt to keep Figure 9.2 as clear as possible, we ignore the fact that currency appreciation may shift IS leftwards.Google Scholar
- 3.An attempt to calculate fundamental equilibrium rates and thereby establish whether a currency is over or undervalued is made by John Williamson, The Exchange Rate System, Institute for International Economics, Policy Analyses in International Economics, No 5, September, 1983.Google Scholar
- 4.As in other chapters no attempt is made here to analyse inflation in any formal sense. Inflation may be integrated into the analysis contained in this chapter by introducing a full employment line and by arguing that a point of intersection between IS and LM to the right of this line will cause inflation.Google Scholar
- 5.Much of the analysis undertaken in this chapter up to now has been essentially short run in nature. The longer run effects are also important. As established in Chapter 6, it is in the very nature of ‘overshooting’ that the short-run effects differ from those in the long run. Monetary contraction which initially leads to an appreciation in the real exchange rate may in the longer run be neutral in real terms. Similarly fiscal expansion may, in the short run, cause the exchange rate to appreciate, but may, in the long run, be associated with depreciation as the effects on the current account come through (note the J curve effect discussed in Chapter 6) and as capital inflows are not sustained and as servicing costs rise.Google Scholar
- To the extent that the dollar appreciation of the early 1980s represented overshooting, one would have expected some subsequent fall in the dollar’s value, as indeed occurred.Google Scholar
- 6.Leading on from note 5, to the extent that the over valuation is temporary, (representing overshooting), it may be expected to correct itself, with no policy action being required. Furthermore, if policy changes were to be introduced at a time when the dollar was in any case beginning to depreciate the risk of causing a ‘crash landing’ becomes significant.Google Scholar