Tuesday, November 20, 2007

Is a Cheap Currency Good?

In the comments section of my first post about the euro, reader Keith asks:
  1. Isn't it better to have a cheap currency? You get to export more and bring in more money. A cheap currency hurts if you travel outside the country, but on the other hand, you have more money to spend because you export more.

  2. Why has the US followed a strong dollar policy? It seems Japan has had the right idea by keeping their currency cheap.

The simple answer to the first question is that a cheap currency is good for the tradables sector (exports, potential exports, and industries that actually or potentially compete with imports) but bad for the notradables sector (everything else). It’s bad for the nontradables sector because the economy has limited resources, and the additional resources that get used in the tradables sector are no longer available for use in the nontradables sector. For example, China has a cheap currency, and it has thriving export industries, but it has really bad health care, presumably in part because people who could be training to be nurses find it more convenient to take factory jobs in the export sector.

There are any number of problems with the last paragraph. For one thing, Gabriel is probably going to complain about my cavalier use of the words “good” and “bad.” I’m pretty sure that, in a model with nominal rigidities, fixed capital, and search costs, a cheap currency can be shown to have good and bad welfare consequences (respectively) in the short run for people associated with those respective sectors. But I’m also quite sure that the proof would be a pain in the ass, and I expect that somebody (I have no idea who) has already done it, so I’m not going to attempt it. As for the long run, exchange rates are irrelevant because prices and wages adjust completely. (Well, not really irrelevant, because there is path-dependence: what happens in the particular short runs helps determine the long-run equilibrium. But that’s getting too deep for now.)

The second problem is that the phrase “limited resources,” while quite valid, is misleading. Resource limitations are not a simple, tight constraint. There is always some unemployment, and always some idle capacity, so there is always the opportunity to push on resource limitations. The problem is, when unemployment gets too low, or capacity utilization gets too high, then inflation starts to accelerate. And it’s never exactly clear how low is too low and how high is too high. If the country has plentiful slack resources, then a cheap currency is good for everybody. If the country is already overutilizing its resources, a cheap currency could be bad for everybody if it causes an inflationary spiral (but if the central bank is on its toes, this presumably won’t happen).

The third problem is that my China example is not a very good one. (Maybe someone else can think of a better example.) China’s health care problems have more to do with bad insurance markets than with potential nurses becoming factory workers. And China’s construction industry – also part of the nontradables sector – seems to be doing fine. China is quite an interesting case, though, because, on the one hand, it appears to have plenty of slack resources (people working inefficiently in agriculture who can easily take factory jobs) and therefore one might think that there is no disadvantage to a cheap currency. But on the other hand, it is beginning to experience an inflation problem, which would suggest that it is getting the worst disadvantage from a cheap currency. Part of the solution to this paradox, I think, is that China is trying to mobilize its slack resources too quickly and running into bottlenecks. And there’s also the issue of natural resources. I could go on and talk about China’s potentially destabilizing absorption of massive dollar reserves and about China’s possible attempt to exploit path dependence and so on, but I want to get to the second question.

So, why has the US followed a strong dollar policy? And should it? In the late 1990s, I think a strong dollar policy made sense (though Dean Baker disagrees). The reason it made sense is that the nontradables sector in the US was doing a lot of useful things – creating new technologies and investment goods to make US production more efficient in the future – and a weaker dollar would have forced a shift of resources out of the nontradables sector.

Today, though, I don’t think a strong dollar makes any sense, and I think most economists would agree. The economy is weak, and we may be going into a recession, so there are a lot of potential slack resources, and the nontradables sector in recent years has not been doing anything terribly useful with its marginal capacity (mostly building a lot more houses than we really need). That doesn’t necessarily mean, though, that a “strong dollar policy” is a bad idea, if a “strong dollar policy” just means a lot of cheerleading by the Treasury Secretary. I think most economists would agree, what we want is for the dollar to fall slowly, so as not to destabilize markets or cause a bout of inflation. But if investors expect the dollar to fall slowly, they will all sell their dollar assets, and the dollar will fall quickly. The solution, I suppose, is for Hank Paulson to keep saying we like a strong dollar and to convince a gradually decreasing number of suckers that he really means it, so they will wait before selling their dollar assets and prevent a free fall.


[Afterthought: I’m beginning to wonder, though, whether the dollar still is very much overvalued against the euro. It’s getting easy to imagine that, at a dollar/euro exchange rate not too far from the present level, once temporary effects wash out, the Euro Zone and the US could both end up with moderate trade deficits, rather than (as it has been recently) the US having a very large deficit and the Euro Zone having roughly balanced trade. Increasingly, the problem is not an overvalued dollar but undervalued currencies that happen to be pegged to the dollar but that perhaps at this point might almost as well be pegged to the euro.]

Labels: , , , ,

12 Comments:

Blogger Gabriel M. said...

I protest! I am not the welfare judgment police! :-)

Tue Nov 20, 05:09:00 PM EST  
Anonymous Mike said...

Taking the risk here to be a bit dull but isn't a balanced currency the best option for any country?

Mon Aug 11, 07:14:00 AM EDT  
Anonymous Anonymous said...

福~
「朵
語‧,最一件事,就。好,你西.............................................................................................................
..................

Thu Apr 02, 10:40:00 AM EDT  
Anonymous Anonymous said...

酒店喝酒,禮服店,酒店小姐,酒店領檯,便服店,鋼琴酒吧,酒店兼職,酒店兼差,酒店打工,伴唱小姐,暑假打工,酒店上班,酒店兼職,ktv酒店,酒店,酒店公關,酒店兼差,酒店上班,酒店打工,禮服酒店,禮服店,酒店小姐,酒店兼差,暑假打工,酒店經紀,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,台北酒店,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,寒假打工,酒店小姐,禮服店 ,酒店小姐,酒店經紀,酒店兼差,暑假打工,酒店小姐,酒店傳播,酒店經紀人,酒店,酒店,酒店,酒店 ,禮服店 , 酒店小姐,酒店經紀,酒店兼差,暑假打工,招待所,酒店小姐,酒店兼差,寒假打工,酒店上班,暑假打工,酒店公關,酒店兼職,禮服店 , 酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工,酒店,酒店,酒店經紀,酒店領檯 ,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,禮服店 ,酒店小姐 ,酒店經紀 ,酒店兼差,暑假打工, 酒店上班,酒店經紀

Mon Apr 20, 11:01:00 PM EDT  
Blogger Talia.float said...

Bought the Tennis Racquet is important, exercise can reduce the harm, especially for the wrist injury. But the good of Tennis Racket in general in the real prices are more expensive, so a lot of websites now have cheap tennis racquet,tennis racquet discount,cheap tennis racket,discount Tennis Racket .

Tue May 19, 12:07:00 AM EDT  
Blogger how to buy air shoes said...

Some new style Puma Speed is in fashion this year. chaussure puma is Puma Shoes in french. Many france like seach “chaussure sport” by the internet when they need buy the Puma shoes or buy the nike max shoes.The information age is really convenient. By the way ,the puma CAT is really good chaussures puma ,don’t forget buy the puma mens shoes and nike air max ltd by the internet when you need them . Do you know Nike Air Shoes is a best Air Shoes .

Spring is coming, and how to choose the polo shirts is the main concern of many people. ralph lauren polo shirts is a classic type and reliable. ed hardy clothing is more in line with the aesthetic ideas of young people, so many young people filled with a variety of ed hardy clothes in their wardrobes. New style ed hardy womens shirt match the new style ed hardy sunglasses , it is a good idea.
Do you think this season is not for ugg boots ? maybe yes .but this season is best time that can buy the cheap ugg boots. Many sellers are selling discounted. Do not miss . Please view my blog and fc2 blog .thank you .

Tue May 19, 06:04:00 AM EDT  
Blogger wow power leveling said...

cheap wow gold buy wow power leveling my wow gold cheapest wow power leveling
replica replica rolex
CHEAP wow power level
BUY power leveling
replica rolex replica
cheap lotro gold
replica rolex
CHEAPEST power leveling
cheap rs gold l

Tue Jun 09, 10:12:00 PM EDT  
Blogger Adi said...

Oes Tsetnoc one of the ways in which we can learn seo besides Mengembalikan Jati Diri Bangsa. By participating in the Oes Tsetnoc or Mengembalikan Jati Diri Bangsa we can improve our seo skills. To find more information about Oest Tsetnoc please visit my Oes Tsetnoc pages. And to find more information about Mengembalikan Jati Diri Bangsa please visit my Mengembalikan Jati Diri Bangsa pages. Thank you So much.

Sun Nov 22, 01:33:00 AM EST  
Anonymous Tag Heuer Watches said...

Rolex Watches Rolex Watches
Tag Heuer Watches Tag Heuer Watches
rolex replica rolex replica
replica rolex replica rolex
rolex replica watches rolex replica watches
replica rolex watches replica rolex watches
Tag Heuer Tag Heuer
replica Tag Heuer replica Tag Heuer
Tag Heuer replica Tag Heuer replica
rolex rolex
rolex air king rolex air king
rolex datejust rolex datejust
rolex day date rolex day date
rolex daytona rolex daytona
rolex gmt rolex gmt
rolex submariner rolex submariner
rolex yachtmaster rolex yachtmaster
rolex air king watches rolex air king watches
rolex datejust watches rolex datejust watches
rolex day date watches rolex day date watches
rolex daytona watches rolex daytona watches
rolex gmt watches rolex gmt watches
rolex submariner watches rolex submariner watches
rolex yachtmaster watches rolex yachtmaster watches

Mon Dec 21, 04:36:00 AM EST  
Anonymous Anonymous said...

i dont know if there suitalbe to write something good website i meet here, for i hope every body could have a good shopping experience online.

here i want to introduce this website, mainly selling nfl jerseys,
ghd, christian louboutin, and air max 95.

they offer 24 hours online service, and very very good customer service.
i buy the air max 90 shoes online on the website, nice design and good quality. that is why i strongly introduce you here.

it is not a advertisment, just share my shopping experience with everybody. hope you have a nice day, and could enjoy the good shopping.

Sat Aug 14, 05:12:00 AM EDT  
Anonymous Anonymous said...

i dont know if there suitalbe to write something good website i meet here, for i hope every body could have a good shopping experience online.

here i want to introduce this website, mainly selling cheap nfl jerseys,
nike dunks, and cheap ghd.

they offer 24 hours online service, and very very good customer service.
i buy the louboutin shoes online on the website, nice design and good quality. that is why i strongly introduce you here.

it is not a advertisment, just share my shopping experience with everybody. hope you have a nice day, and could enjoy the good shopping.

Sun Aug 15, 11:44:00 PM EDT  
Anonymous Anonymous said...

|Jimmy Choo Black boots
|Jimmy Choo Embossed leather boots
|Jimmy Choo Grand suede ankle boots
Christian Louboutin Peplum T-bar sandals
Christian Louboutin Pique 140 sandals

Wed Sep 22, 11:45:00 AM EDT  

Post a Comment

Links to this post:

Create a Link

<< Home