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US shocks and global exchange rate configurations

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  • Marcel Fratzscher

Abstract

"Many academics and observers emphasize that a sharp US dollar depreciation is inevitable for returning the burgeoning US current account deficit to more sustainable levels. How may such a US dollar adjustment occur, and what may it imply for global exchange rate configurations? The paper focuses on the role of US-specific economic shocks in the adjustment process, and finds that such US shocks have historically exerted a remarkably heterogeneous effect across currencies. It shows that this heterogeneity is not only due to policy choices of inflexible exchange rate regimes or to monetary policy, but to an important extent is explained by market forces, in particular the degree of financial integration - foremost in portfolio investment - though not by trade. This helps explain why it has been in particular the euro, and its predecessor currencies, as well as other European currencies that have contributed the bulk to the adjustment of the US dollar effective exchange rate over the past 25 years, while other flexible currencies have been much less responsive to US shocks." Copyright (c) CEPR, CES, MSH, 2008.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0327.2008.00202.x
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Bibliographic Info

Article provided by CEPR & CES & MSH in its journal Economic Policy.

Volume (Year): 23 (2008)
Issue (Month): (04)
Pages: 363-409

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Handle: RePEc:bla:ecpoli:v:23:y:2008:i::p:363-409

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References

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Citations

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Cited by:
  1. Andrea Fracasso & Stefano Schiavo, 2009. "Trade-imbalances networks and exchange rate adjustments: the paradox of a new Plaza. The XIVth Spring Meeting of Young Economists (SMYE-2009), Istanbul, April 2009," Sciences Po publications info:hdl:2441/10028, Sciences Po.
  2. Arteta, Carlos & Kamin, Steven B. & Vitanza, Justin, 2011. "The puzzling peso," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1814-1835.
  3. Fratzscher, Marcel, 2009. "What explains global exchange rate movements during the financial crisis?," Working Paper Series 1060, European Central Bank.
  4. Fracasso, Andrea & Schiavo, Stefano, 2009. "Global imbalances, exchange rates adjustment and the crisis: Implications from network analysis," Journal of Policy Modeling, Elsevier, vol. 31(5), pages 601-619, September.

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