Love it or hate it... the dollar's here to stay

Eswar Prasad interviewed by Viv Davies,

Date Published

Sat, 03/29/2014

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See Also

Prasad, Eswar S (2014) The Dollar Trap: How the U.S. dollar tightened its grip on global finance , Princeton University Press.

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Topics

Exchange rates
Tags
foreign exchange reserves, international currency, exchange-rate policy, Currency wars, Emerging-market economies

Related Article(s)

Is there room for more than one international currency? No consistent safe-haven assets, but US remains special Currency wars and the euro Are exchange rates predictable?
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Independent monetary policies, synchronised outcomes

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The recession in the Eurozone has given new life to optimal-currency-area thinking. The argument goes that the disadvantages of a single currency come from the loss of flexibility and ability to use monetary policy to respond to “asymmetric shocks” (Krugman and Obstfeld 2009). The often-unarticulated presumption is that countries with independent monetary policies would make different policy decisions as long as contemporaneous shocks to output and employment were asymmetric.

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Topics:  Exchange rates Monetary policy

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Is there a dilemma with the Trilemma?

Michael W Klein, Jay C. Shambaugh 27 September 2013

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In the Handbook of Safeguarding Global Financial Stability, the chapter “Capital Mobility and Exchange Rate Regimes” begins “Forced to state all the insights of international macroeconomics while standing on one leg, one could do worse than raise a foot off the ground and say something like:

  • ‘Governments face the policy trilemma – the rest is commentary.’”

Admittedly, that entry was written by one of us.

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Topics:  Exchange rates Monetary policy

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Fixed versus flexible exchange-rate regimes: Do they matter for real exchange-rate persistence?

Paul Bergin, Reuven Glick, Jyh-lin Wu 04 October 2012

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Flexible exchange rates have been praised in economic theory as a mechanism for helping relative prices adjust between countries in response to shocks to relative supply and demand (Friedman 1953). In this view, fluctuations in the real exchange rate, measuring the relative cost of living across countries, are a welcome thing. However, an alternative explanation for fluctuations in the real exchange rate is the presence of shocks arising in the financial market that move the nominal exchange rate, which then are passed on to the real exchange rate due to sticky prices.

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Topics:  Europe's nations and regions Monetary policy

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The limits of a purely intra-euro rebalancing strategy

Zsolt Darvas 05 September 2012

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The perceived failure of Greece, Portugal, and Spain to achieve sustainable external positions and economic growth inside the Eurozone is a major factor behind the current crisis. Their trade deficits should be turned to sizeable surpluses in which real exchange rate developments should play a role. Some adjustments, both in trade balances and real exchange rates, have already taken place in the past few years. Is the remaining adjustment a purely intra-Eurozone issue or does the external value of the euro play a role?

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Topics:  EU policies Europe's nations and regions Monetary policy

Tags:  Spain, Greece, exchange-rate policy, Eurozone crisis, Portugal

Small open economies have to be managed differently: devaluation is contractionary in both the short and long run

DeLisle Worrell 23 June 2012

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There is a fallacy at the root of most of the discussion of the European economic crisis, and it is that countries like Greece would have the option to grow their economies through exchange rate depreciation, were they outside the Eurozone. In reality, exchange-rate depreciation always depresses output in small open economies, because there is zero elasticity of substitution between internationally traded goods and services and domestically produced goods and services, either in consumption or in production.

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Topics:  Europe's nations and regions Global economy Monetary policy

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Foreign-exchange intervention and the fundamental trilemma of international finance: Notes for currency wars

Michael Bordo, Owen F Humpage, Anna J Schwartz 18 June 2012

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In the mid-1990s, many of the large developed countries ended their activist approach to foreign-exchange-market intervention. Yet while these operations faded, they never disappeared. The Great Recession recently piqued interest in them, as exchange-rate volatility increased and threats of currency wars were heard (see Neely 2011). Still, then, the key question remains: Do sterilised interventions allow countries a way around the fundamental trilemma of international finance by providing them with a means of systematically affecting exchange rates independent of their monetary policies?

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Topics:  International finance

Tags:  exchange-rate policy, financial trilemma

On Inflation Targeting and Forex Intervention: Are Two Targets Better Than One?

Jonathan D Ostry, Atish R Ghosh, Marcos Chamon 27 May 2012

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The global financial crisis has reminded emerging market economies, if they needed reminding, that capital flows can be highly volatile and that crises need not be home grown. Emerging markets have been affected in a variety of ways, not least by the sharp ups and downs in exchange rates that volatile capital flows engender. These ups and downs may be less benign in emerging markets than they might be in advanced economies for a number of reasons:

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Topics:  Monetary policy

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How should Japan’s current exchange rate be viewed?

Takatoshi Ito, Junko Shimizu 20 March 2012

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Japan is frequently cited by US and European commentators as a warning of what could happen to their economies (see, for instance, Muellbauer and Murata 2011). We hear less, however, about what is happening now. The yen-to-dollar exchange rate briefly reached its post-war high of 75.95 on 19 August 2011 in the New York Foreign Exchange Market and stayed at that level for the rest of the year.

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Topics:  Global crisis International finance International trade

Tags:  Japan, exchange-rate policy

The renminbi’s prospects as a global reserve currency

Eswar Prasad, Lei (Sandy) Ye 16 February 2012

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Popular discussions about the prospects of China’s currency – the renminbi – range from the view that it is on the threshold of becoming the dominant global reserve currency to the concern that rapid capital-account opening poses serious risks for China.

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Topics:  International finance International trade

Tags:  China, globalisation, renminbi, exchange-rate policy

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