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Competitive devaluations: a welfare-based approach
This paper studies the mechanism of international transmission of exchange rate shocks within a three-country Center-Periphery model, providing a choice-theoretic framework for the policy analysis and empirical assessment of competitive devaluations. If relative prices and terms of trade exhibit some flexibility conforming to the law of one price, a devaluation by one country is beggar-thy-neighbor relative to another country through its effects on cost-competitiveness in a third market. Yet, due to direct bilateral trade between the two countries, there is a large range of parameter values ...
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"Beggar-thy-neighbor" or "beggar-thyself"? the income effect of exchange rate fluctuations
This paper analyzes the impact of exchange rate fluctuations when they are only partially passed through to consumer prices. We show that an exchange rate depreciation does not necessarily have a beggar-thy-neighbor effect and may in fact have an opposite, or beggar-thyself, effect. The direction of the welfare effect depends on who owns the firms importing goods from producers and selling them to consumers, an issue that has not been explored in the earlier literature
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Borrowing without debt? Understanding the U.S. international investment position
Sustained large U.S. current account deficits have led some economists and policymakers to worry that future current account adjustment could occur through a sudden and disruptive depreciation of the dollar and a sharp drop in U.S. consumption. Two factors that, to date, have cast doubt on such concerns are the stability of U.S. net external liabilities and the minimal net income payments made by the United States on these liabilities. We show that the stability of the external position reflects sizable capital gains stemming from strong foreign equity markets and a weaker dollar - conditions ...
Report
On the distributional effects of exchange rate fluctuations
The paper studies the differential impact of exchange rate fluctuations on households in a country. I extend earlier research by relaxing the assumption of complete international sectoral specialization. My setup allows for the presence of several different sectors in a given country, each producing a different type of good. Combined with incomplete asset markets, the sectoral dimension leads to a heterogeneous impact of exchange rate fluctuation within each country. In particular, although a depreciation of a country's currency has an adverse 'beggar-thyself' effect for the country as a ...
Journal Article
Curbing unemployment in Europe: are there lessons from Ireland and the Netherlands?
Since the mid-1980s, unemployment rates in Ireland and the Netherlands have plummeted, while the average rate for the European Union has maintained its longtime high level. Ambitious labor market reforms_including wage moderation and the tightening of unemployment benefits_have helped to bring the Irish and Dutch rates down. Other European countries would benefit from adopting similar reforms, but they are unlikely to see the same dramatic improvement in their unemployment numbers.
Journal Article
The impact of exchange rate movements on U.S. foreign debt
In 2001, the United States' net debt to the rest of the world jumped to $2.3 trillion, a level double that recorded in 1999. Much of the increase reflects the new borrowing undertaken by the country to finance its mounting current account deficit. A third of the change, however, can be traced to a simple accounting effect--the impact of a rising dollar on the value of U.S. assets held abroad.
Report
The role of consumption substitutability in the international transmission of shocks
This paper develops a general framework to analyze the welfare consequences of monetary and fiscal shocks in an open economy, focusing on the role of the degree of substitutability between goods produced in different countries. We find that an expansionary shock that would be beneficial in a closed economy can have an adverse "beggar-thyself" effect in the country where it takes place, or an adverse "beggar-thy-neighbor" effect on its neighbor. Such effects depend significantly on the degree of substitutability between goods produced in different countries, as well as the exact nature ...
Working Paper
Could capital gains smooth a current account rebalancing?
A narrowing of the U.S. current account deficit through exchange rate movements is likely to entail a substantial depreciation of the dollar, as stressed in the widely cited contribution by Obstfeld and Rogoff (2005). We assess how the adjustment is affected by the high degree of international financial integration in the world economy. A growing body of research stresses the increasing leverage in international financial positions, with industrialized economies holding substantial and growing financial claims on each other. Exchange rate movements then leads to valuations effects as the ...
Journal Article
The economics of currency crises and contagion: an introduction
Two theories of the causes of currency crises prevail in the economic literature. The first traces currency instability to countries' structural imbalances and weak policies; the second identifies arbitrary shifts in market expectations as the principal source of instability. The authors of this article contend that only a synthesis of these theories can capture the complexity of the 1997-98 Asian currency crisis. In their view, the crisis resulted from the interaction of structural weaknesses and volatile international capital markets. The authors also cite two other factors that contributed ...
Report
Could capital gains smooth a current account rebalancing?
A narrowing of the U.S. current account deficit through exchange rate movements is likely to entail a substantial depreciation of the dollar, as stressed in research by Obstfeld and Rogoff. We assess how the adjustment is affected by the high degree of financial integration in the world economy. A growing body of research emphasizes the increasing leverage in international financial positions, with industrialized economies holding substantial and growing financial claims on each other. Exchange rate movements then lead to valuation effects as the currency composition of a country's assets and ...