Abstract
Discussions about future prospects for the US dollar generally focus on whether the present level of the current account deficit is sustainable.1 If the answer is no, the subsequent question is what depreciation is required to produce a sustainable deficit (see Obstfeld and Rogoff 2004, for example). This short paper addresses both issues, but also explores two additional points. First, we examine whether a significant reduction in the value of the dollar will occur even if large deficits continue, because more net exports are required to service a growing debt burden. Second, we suggest that any depreciation in the dollar is likely to be variable across different currencies, with a relatively modest depreciation against the Euro and Sterling. The paper quantifies both effects using the FABEER model.2
Here and below the term sustainable implies the current account that is implied by medium term (cyclically adjusted) private and public sector savings behaviour.
The Five Area Bilateral Equilibrium Exchange Rate (FABEER) model was first used in Wren-Lewis (2003), which was one of the background studies for the UK Chancellor’s assessment of the desirability of UK entry into European Monetary Union. In was subsequently used in Wren-Lewis (2004), which extended the analysis to cover some additional currencies, including the Chinese Renminbi.
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Wren-Lewis, S. (2008). When the Dollar Falls. In: Neck, R., Richter, C., Mooslechner, P. (eds) Quantitative Economic Policy. Advances in Computational Economics, vol 20. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-540-74684-3_14
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DOI: https://doi.org/10.1007/978-3-540-74684-3_14
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-540-74683-6
Online ISBN: 978-3-540-74684-3
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