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Tag Archives: Exchange Rates

The Fault Is … in Ourselves

Or more correctly, in Mr. Trump. As reported by Bloomberg, Mr. Trump has said: “a gentleman that likes raising interest rates in the Fed, we have a gentleman that loves quantitative tightening in the Fed, we have a gentleman that likes a very strong dollar in the Fed.” I think Mr. Trump is partly himself to blame for the strength of the dollar. To show this, I estimate the following relationship over 2014Q1-18Q3, with r the log real trade weighted value of the US dollar, EPU world economic...

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The VSD (“Very Stable Dollar”)

Is this what we want the Chinese to peg against? Figure 1: Log real value of US dollar against a broad basket of currencies, 1973M01=0. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED.Here the short run volatility of the dollar, illustrated. Figure 2: Month-on-month annualized appreciation of real value of US dollar against a broad basket of currencies. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED, and author’s...

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A Primer on Exchange Rate Misalignment (Updated)

As the administration pushes for “stability” in the Chinese exchange rate while imposing tariffs on China, it might be useful to recount the various ways in which different observers define currency “misalignment”. Here I update a primer first posted in 2010. Currency misalignment can be determined on the basis of the following criteria or models: Relative purchasing power parity (PPP)Absolute purchasing power parityThe “Penn Effect”The behavioral equilibrium exchange rate (BEER)...

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“International Spillovers of Monetary Policy: Conventional Policy vs. Quantitative Easing”

That’s the title of a fascinating new paper with important policy implications. This paper evaluates the popular view that quantitative easing exerts greater international spillovers than conventional monetary policies. We employ a novel approach to compare the international spillovers of conventional and balance sheet policies undertaken by the Federal Reserve. In principle, conventional monetary policy affects bond yields and financial conditions by affecting the expected path of short...

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“A Third of a Century of Currency Expectations Data: The Carry Trade and the Risk Premium”

That’s the title of a new paper, coauthored with Jeffrey Frankel, using data extending back to August 1986. For four decades economists have been finding that the forward discount is a very biased forecast of future changes in the exchange rate. The carry trade makes money, on average. For just as long, they have been debating the appropriate interpretation of the bias. Is it evidence of an exchange risk premium? Under that interpretation, a currency that sells at a forward discount does...

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We need to unify monetary theory and monetary policy

Before today’s post, a few quick comments.  I have a piece on Trump’s “deregulation” policies at MarketWatch.  I have a Ted talk on public opinion at Econlog. It’s clear to me that there is something seriously wrong with the field of monetary economics.  The profession got 2008-09 almost entirely wrong.  But it’s hard to pin down exactly where the problem lies.  After all, there are increasingly sophisticated models being developed by economists who are much smarter than me. ...

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Guest Contribution: “Trade War is Not a Reason to Ease Money”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A appeared in Project Syndicate on November 26th. We are in a trade war, with no sign of peace breaking out anytime soon. By now the disruption to trade looks to be extensive enough to factor negatively into forecasts for economic growth. Does that mean that the Fed should change its...

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Origins and Challenges of a Strong Dollar

That’s the title of an op-ed appearing in Nikkei newspaper (日本経済新聞): Chinn, as translated, in The Nihon Keizai Shinbun. Over the past four years, the US dollar has exhibited noticeable strength. The dollar appreciated 17% in inflation adjusted terms from mid-2014 to the eve of the election; upon the election of Donald J. Trump, the dollar again jumped another 5% in anticipation of fiscal stimulus and the Fed’s interest rate response. Throughout 2017, as the Trump Administration struggled to...

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Every day it gets worse

Little did we know that during the golden 1990s we were complaining about things that would look utterly trivial in retrospect. The sheer stupidity of the 21st century is so mind-boggling it leaves me almost speechless. But not quite. Consider the “problem” of currency manipulation. Let’s start with the fact that currency manipulation is a strange term to apply to a hodgepodge of government policies that may or may not impact the current account balance. For instance, you might...

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JP Morgan Chase: “U.S.-China endgame involving 25 percent U.S. tariffs on all Chinese goods in 2019”

That’s according to Bloomberg. With little prospect of a restart for U.S.-China trade talks, JPMorgan Chase & Co. now expects an escalation in tensions that will see higher American tariffs on all Chinese imports, sending the yuan sliding to its weakest against the dollar in more than a decade. “JPMorgan has adopted a new baseline that assumes a U.S.-China endgame involving 25 percent U.S. tariffs on all Chinese goods in 2019,” JPMorgan strategists including John Normand wrote in a...

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