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Tag Archives: Exchange Rates

Macroeconomic Competitiveness

Competitiveness is often appealed to in popular discourse, but seldom defined. In macroeconomics, competitiveness is usually interpreted as cost competitiveness. Chinn and Johnston (JPAM, 1994) discuss the topic at length. Here is the OECD’s measure of cost competitiveness since 1999, along with the Fed’s CPI deflated measure of the dollar against a broad basket of currencies. Figure 1: Unit labor cost (ULC) in manufacturing deflated value of US dollar (blue), estimated ULC deflated series...

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The Dollar Depreciates – And That’s a Good Thing

Interesting to note that the dollar has declined in tandem with economic policy uncertainty, as measured by the Baker, Bloom & Davis index (and predicted by historical correlations). Source: FRED. Not all else is held constant. Expected inflation has risen since the election — about 0.8 ppts on the 5 year breakeven — and the real ten year interest rate has fallen: about 15 bps. That means the decline in the dollar’s value is over-explained. Real rates have fallen somewhat, despite...

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Treasury Secretary Designate Yellen on the Dollar

From Reuters today: “The value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy”, Yellen will say, if asked about the incoming administration’s dollar policy, according to the report. Just because the US takes no action to depreciate the dollar doesn’t mean it won’t move. Market forces includes expectations of future policy, and perceived risk and...

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“Is a Dollar Crash Coming?”

That’s the title of a symposium in The International Economy, with Anders Åslund, Scott K.H. Bessent, Lorenzo Bini Smaghi, Jill Carlson, Stephen G. Cecchetti, Menzie D. Chinn, Lorenzo Codogno, Tim Congdon, Marek Dabrowski, Mohamed A. El-Erian, Heiner Flassbeck, Takeshi Fujimaki, Joseph E. Gagnon, James K. Galbraith, James E. Glassman, Michael Hüther, Richard Jerram, Gary N. Kleiman, Anne O. Krueger, Mickey D. Levy, Thomas Mayer, Jim O’Neill, Adam S. Posen, Holger Schmieding, Derek Scissors,...

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The Strong Dollar Debate, Yet Again

(Somewhat repetitive of a 2007 post…) Steven Englander of Standard Charter writes several weeks ago (not online): “From the Treasury’s perspective, the purpose of a strong dollar policy is less a strong dollar itself than to encourage foreigners to lend to the US on favourable terms even when the dollar is under pressure. The success of a strong dollar policy is reflected in the absence of USD risk premium on US assets when the USD is weak. In fact, the preferred asset market outcome is...

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Some Asset Market Reactions

Stock, currency and bond markets respond (up, up, yield up) on news of likely Democratic control of the Senate Figure 1: DJIA, as of noon CST, 1/6/2021. Source: Tradingeconomics.com. Stock market jumps – suggesting expectations of higher present value of dividends (despite perhaps higher corporate taxes, see this post). Interestingly, the dollar jumps as well, with some zig-zagging. This might reflect revised expectations of faster economic growth. Figure 2: DXY trade weighted value of...

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Remembering Richard Cooper

TweetDecember 24, 2020 —     Richard N. Cooper (Dick), who passed away Wednesday evening at the age of 86, was always young for his age.  Jim Tobin once told me a story from when Dick was a senior staff economist at the President’s Council of Economic Advisers (1961-63).  He used to bring his bicycle into his office at the Old Executive Office Building.  As I remember the story, President Kennedy remarked that apparently a high school student worked at the CEA! As recently as a year ago,...

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Treasury’s FX Report – Currency Manipulation versus Currency Misalignment

The Treasury’s semi-annual report designated Switzerland and Vietnam as currency manipulators. Without taking a definitive stand on currency manipulation, I do want to highlight where Vietnam (and Switzerland) stand if evaluated by the Big Mac Parity/Penn Effect: Figure 1: Log Big Mac dollar price in July 2020 plotted against log 2020 per capita income in 2017 I$. Penn Effect line estimated using regression (red) and 60% prediction interval (gray). Source: Economist, IMF World Economic...

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Debasing the Dollar? (Or Inflation Looming, Again?)

Worried about currency debasement? Do we find out anything from the nominal exchange rate? In a flexible price monetary model (sometimes called the monetarist model of the exchange rate), changes in the money supply should be immediately reflected in the exchange rate. Here’s a plot of the trade weighted US dollar in nominal terms, shown so that a movement upward is a dollar depreciation. Also shown is M2 divided by real GDP. both are shown on a log scale. According to the simple monetarist...

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