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The process by which the Dollar will fall: the effect of forward-looking consumers

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  • Vines, David
  • Kuralbayeva, Karlygash

Abstract

This paper extends the analysis of the forthcoming fall in the dollar by Blanchard, Giavazzi and SÃ 2005), using a model which incorporates forward-looking consumers. It provides additional underpinnings for the idea of a rapid adjustment in the value of the dollar. We analyze what will happen to the dollar value when forward-looking consumers, in anticipation of the reduction in the current account deficit, cut their consumption. We show that the real interest rate must fall as a result, and that this causes the exchange rate to fall more initially. However we also show that the interest rate does not fall greatly initially, and so that these effects are not large. But they add to pressures causing a rapid fall in the dollar.

Suggested Citation

  • Vines, David & Kuralbayeva, Karlygash, 2009. "The process by which the Dollar will fall: the effect of forward-looking consumers," CEPR Discussion Papers 7325, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:7325
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    References listed on IDEAS

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    1. Benjamin Hunt & Alessandro Rebucci, 2005. "The US Dollar and the Trade Deficit: What Accounts for the Late 1990s?," International Finance, Wiley Blackwell, vol. 8(3), pages 399-434, December.
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    Cited by:

    1. Paul Luk & David Vines, 2014. "Debt Deleveraging and the Zero Bound: Potentially Perverse Effects of Real Exchange Rate Movements," Working Papers 202014, Hong Kong Institute for Monetary Research.

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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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