Is the Strong Dollar Sustainable?

Paul Krugman

No 1644, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper presents evidence strongly suggesting that the current strength of the dollar reflects myopic behavior by international investors; that is, that part of the dollar's strength can be viewed as a speculative bubble. At some point this bubble will burst, leading to a sharp fall in the dollar's value.The essential argument is that given the modest real interest differentials between the U.S. and its trading partners, the dollar'sstrength amounts to an implicit forecast on the part of the market that with high probability the dollar will remain very strong for an extended period. The paper shows that such sustained dollar strength would lead the U.S. to Latin American levels of debt relative to GNP, which is presumably not feasible. Allowing for the possibility that something will be done to bring the dollar down before this happens actually reinforces the argument that the current value of the dollar is unreasonable.

Date: 1985-06
Note: ITI IFM
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Published as Krugman, Paul R. "Is the Strong Dollar Sustainable?" The U.S. Dollar--Recent Developments, Outlook, and Policy Options, pp. 103-132. Kansas City: The Federal Reserve Bank of Kansas City, 1985.
Published as Paul R. Krugman, 1985. "Is the strong dollar sustainable?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 103-155.

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