Exchange Rates and Trade Balances under the Dollar Standard

Hong (Helen) Qiao

in The Unloved Dollar Standard

Published in print December 2012 | ISBN: 9780199937004
Published online January 2013 | e-ISBN: 9780199980703 | DOI:
Exchange Rates and Trade Balances under the Dollar Standard

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This chapter considers the impacts of discrete exchange rate changes in open economies with net foreign exchange liabilities and assets under the dollar standard. The combination of wealth, price, investment, and indirect investment effects (when present) increases the complexity of predicting current-account movements following exchange rate changes, which in many cases lead to ambiguous results. For instance, currency devaluation may well improve the trade balance of a debtor economy by depressing domestic absorption, whereas an appreciation has an ambiguous effect on the trade balance of a creditor economy. Because exchange rate changes can no longer be separated from domestic price-level and absorption effects, except in special cases, they cannot be used predictably to adjust the trade balance.

Keywords: exchange rate changes; globalized investment; absorption; wealth effects; trade balance ambiguity

Chapter.  7630 words.  Illustrated.

Subjects: Financial Markets

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