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Exchange rates and U.S. external adjustment in the short run and the long run

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  • Peter Hooper

Abstract

The objective of this paper attempts to reconcile PPP-based views are model-based views about prospects for V.S. external adjustment in the medium term. Projections based on conventional models of the current account do not fully capture ongoing adjustments to exchange rate changes that are implicit in long-run PPP theory. In particular, the model-based projections fail to capture longer-run shifts in relative output capacity in response to sustained cost differentials (or deviations from absolute purchasing power parity) across countries. Such supply-side adjustments appear to have been quantitatively important in the past. With V.S. labor costs in manufacturing now noticeably below those in some other major industrial countries, these supply-side adjustments are potentially important in the period ahead. Nevertheless, when the model extrapolations are revised to factor in such longer-run adjustments, the projected deficit remains sizable.

Suggested Citation

  • Peter Hooper, 1989. "Exchange rates and U.S. external adjustment in the short run and the long run," International Finance Discussion Papers 346, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:346
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    File URL: http://www.federalreserve.gov/pubs/ifdp/1989/346/default.htm
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    References listed on IDEAS

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    1. Goldstein, Morris & Khan, Mohsin S., 1985. "Income and price effects in foreign trade," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 20, pages 1041-1105 Elsevier.
    2. Ellen E. Meade, 1988. "Exchange rates, adjustment, and the J-curve," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 633-644.
    3. Paul R. Krugman & Richard E. Baldwin, 1987. "The Persistence of the U.S. Trade Deficit," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(1), pages 1-56.
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    Cited by:

    1. Jaime R. Marquez & Neil R. Ericsson, 1990. "Evaluating the predictive performance of trade-account models," International Finance Discussion Papers 377, Board of Governors of the Federal Reserve System (U.S.).
    2. Robert C. Feenstra & Clinton R. Shiells, 1996. "Bias in U.S. Import Prices and Demand," NBER Chapters,in: The Economics of New Goods, pages 249-276 National Bureau of Economic Research, Inc.
    3. Feenstra & R.C., 1990. "New Goods and Index Members: U.S. Import Prices," Papers 371, California Davis - Institute of Governmental Affairs.

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