In this paper we examine the behavior of interest rates and exchange rates following a variety of shocks to the international monetary system. Our analysis suggests that real interest rates in the US and Europe will remain low relative to historical experience for an extended period but converge slowly toward normal levels. During this adjustment interval, the US absorbs a disproportionate share of world savings. After a substantial initial appreciation of floating currencies relative to the dollar, the dollar and other floating currencies remain constant relative to each other. An improvement in the investment climate in Europe during the adjustment period would generate an immediate depreciation of the euro relative to the dollar. In real terms, the dollar and the floating currencies will eventually have to depreciate relative to the managed currencies. But most of the adjustment in the US trade account will come as US absorption responds to increases in real interest rates.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
11771.
Length: Date of creation: Nov 2005 Date of revision: Handle: RePEc:nbr:nberwo:11771
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Find related papers by JEL classification: F02 - International Economics - - General - - - International Economic Order; Noneconomic International Organizations;; Economic Integration and Globalization: General F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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