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

Author

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  • Kuralbayeva, Karlygash
  • Vines, David

Abstract

This paper extends the analysis of the forthcoming fall in the dollar by Blanchard, Giavazzi and Sà 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

  • Kuralbayeva, Karlygash & Vines, David, 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. Hamid Faruqee & Douglas Laxton & Dirk Muir & Paolo A. Pesenti, 2007. "Smooth Landing or Crash? Model-Based Scenarios of Global Current Account Rebalancing," NBER Chapters,in: G7 Current Account Imbalances: Sustainability and Adjustment, pages 377-456 National Bureau of Economic Research, Inc.
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    6. Enrique G. Mendoza, 2007. "Financial Integration, Financial Deepness and Global Imbalance," 2007 Meeting Papers 746, Society for Economic Dynamics.
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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.

    More about this item

    Keywords

    imperfect substitutability; Net foreign assets; valuation effects;

    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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