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Currency appreciation and "deindustrialization": a European perspective

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  • John A. Tatom

Abstract

During the 1980s, policy advisers were successful in promoting the view that movements in the value of the dollar have an inverse relationship to U.S. international competitiveness. This article explains their hypothesis, as well as the counterargument that exchange rates positively reflect a country's competitiveness. Economic policies that boost competitiveness also raise the value of the domestic currency. The mirror image of these hypotheses apply to U.S. trading partners, including Europe. The evidence indicates that European countries were not "deindustralized" from 1985 to 1990, when the ECU rose in value by more than the dollar had risen in 1980-1985. Instead, European competitiveness rebounded strongly in the late-1980s, reversing the stagnant performance of the early-1980s. Similarly, during the early-1980s, when the United States was, on one unsupported view, deindustralizing, European nations generally did not enjoy a surge in their share of output or capital formation. Instead, they suffered from "Euroscierosis".

Suggested Citation

  • John A. Tatom, 1994. "Currency appreciation and "deindustrialization": a European perspective," Working Papers 1992-006, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:1992-006
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    References listed on IDEAS

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    1. Robert Solomon, 1985. "Effects of the strong dollar," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 65-92.
    2. William H. Branson, 1986. "The Limits of Monetary Coordination As Exchange Rate Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 175-194.
    3. Stockman, Alan C. & Svensson, Lars E. O., 1987. "Capital flows, investment, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 171-201, March.
    4. Mack Ott, 1984. "Depreciation, inflation and investment incentives: the effects of the tax acts of 1981 and 1982," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 17-30.
    5. Heinz Gluck & Dieter Proske & John A. Tatom, 1992. "Monetary and exchange rate policy in Austria: an early example of policy coordination," Working Papers 1992-005, Federal Reserve Bank of St. Louis.
    6. Robert Z. Lawrence, 1983. "Is Trade Deindustrializing America? A Medium-Term Perspective," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(1), pages 129-172.
    7. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
    8. Koester, Reinhard B & Kormendi, Roger C, 1989. "Taxation, Aggregate Activity and Economic Growth: Cross-Country Evidence on Some Supply-Side Hypotheses," Economic Inquiry, Western Economic Association International, vol. 27(3), pages 367-386, July.
    9. Stephen A. Meyer, 1986. "Trade deficits and the dollar: a macroeconomic perspective," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 15-25.
    10. Georg Winckler, 1991. "Exchange Rate Appreciation As a Signal of a New Policy Stance," IMF Working Papers 91/32, International Monetary Fund.
    11. Glick, Reuven & Hutchison, Michael M, 1990. "Does Exchange Rate Appreciation 'Deindustrialize' the Open Economy? A Critique of U.S. Evidence," Economic Inquiry, Western Economic Association International, vol. 28(1), pages 19-37, January.
    12. Razin, Assaf, 1984. "Capital movements, intersectoral resource shifts and the trade balance," European Economic Review, Elsevier, vol. 26(1-2), pages 135-152.
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    Cited by:

    1. Frait , Jan & Komárek, Luboš, 2001. "REAL Exchange rate trends in transitional countries," The Warwick Economics Research Paper Series (TWERPS) 596, University of Warwick, Department of Economics.
    2. Vlaar, Peter J.G., 2007. "GDP growth and currency valuation: The case of the dollar," Journal of International Money and Finance, Elsevier, vol. 26(8), pages 1424-1449, December.
    3. Feridun, M. & Isola, W.A., 2005. "Market Driven Reforms and the Structural Characteristics of Employment in Nigeria: An Econometric Analysis, 1986-2003," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 5(1).

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