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Will there be a dollar crisis?

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Author Info
Paul Krugman

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Abstract

"Almost everyone believes that the US current account deficit must eventually end, and that this end will involve dollar depreciation. However, many believe that this depreciation will take place gradually. This paper shows that any process of gradual dollar decline fast enough to prevent the accumulation of implausible levels of US external debt would impose capital losses on investors much larger than they currently expect. As a result, there will at some point have to be a 'Wile E. Coyote moment'- a point at which expectations are revised, and the dollar drops sharply. It is much less clear, however, whether this 'crisis' will produce macroeconomic problems." Copyright (c) CEPR, CES, MSH, 2007.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0327.2007.00183.x
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Publisher Info
Article provided by CEPR, CES, MSH in its journal Economic Policy.

Volume (Year): 22 (2007)
Issue (Month): (07)
Pages: 435-467
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Handle: RePEc:bla:ecpoli:v:22:y:2007:i::p:435-467

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  1. Gian Maria Milesi-Ferretti & Philip R. Lane, 2007. "Europe and Global Imbalances," IMF Working Papers 07/144, International Monetary Fund. [Downloadable!]
    Other versions:
  2. Rod Tyers & Iain Bain, 2008. "American and European Financial Shocks: Implications for Chinese Economic Performance," ANUCBE School of Economics Working Papers 2008-491, Australian National University, College of Business and Economics, School of Economics. [Downloadable!]
    Other versions:
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