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Is the Strong Dollar Sustainable?

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  • Paul R. Krugman

Abstract

This paper presents evidence strongly suggesting that the current strength of the dollar reflects myopic behavior by international investors; that is, that part of the dollar's strength can be viewed as a speculative bubble. At some point this bubble will burst, leading to a sharp fall in the dollar's value.The essential argument is that given the modest real interest differentials between the U.S. and its trading partners, the dollar'sstrength amounts to an implicit forecast on the part of the market that with high probability the dollar will remain very strong for an extended period. The paper shows that such sustained dollar strength would lead the U.S. to Latin American levels of debt relative to GNP, which is presumably not feasible. Allowing for the possibility that something will be done to bring the dollar down before this happens actually reinforces the argument that the current value of the dollar is unreasonable.

Suggested Citation

  • Paul R. Krugman, 1985. "Is the Strong Dollar Sustainable?," NBER Working Papers 1644, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1644
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    1. J. M. Keynes, 1937. "The General Theory of Employment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 51(2), pages 209-223.
    2. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 48(2), pages 289-309.
    3. Olivier J. Blanchard & Lawrence H. Summers, 1984. "Perspectives on High World Real Interest Rates," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 15(2), pages 273-334.
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