The process by which the Dollar will fall: the effect of forward-looking consumers

Karlygash Kuralbayeva and David Vines

No 7325, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper extends the analysis of the forthcoming fall in the dollar by Blanchard, Giavazzi and Sà 2005), using a model which incorporates forward-looking consumers. It provides additional underpinnings for the idea of a rapid adjustment in the value of the dollar. We analyze what will happen to the dollar value when forward-looking consumers, in anticipation of the reduction in the current account deficit, cut their consumption. We show that the real interest rate must fall as a result, and that this causes the exchange rate to fall more initially. However we also show that the interest rate does not fall greatly initially, and so that these effects are not large. But they add to pressures causing a rapid fall in the dollar.

Keywords: imperfect substitutability; Net foreign assets; valuation effects (search for similar items in EconPapers)
JEL-codes: F32 F41 G15 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon and nep-opm
Date: 2009-06

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