Interest Rates, Exchange Rates and International Adjustment / Michael P. Dooley, David Folkerts-Landau, Peter M. Garber.

Format:

Book

Author/Creator:

Dooley, Michael P.

Contributor:

National Bureau of Economic Research.

Folkerts-Landau, David.

Garber, Peter M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w11771.

NBER working paper series no. w11771

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2005.

Summary:

In this paper we examine the behavior of interest rates and exchange rates following a variety of shocks to the international monetary system. Our analysis suggests that real interest rates in the US and Europe will remain low relative to historical experience for an extended period but converge slowly toward normal levels. During this adjustment interval, the US absorbs a disproportionate share of world savings. After a substantial initial appreciation of floating currencies relative to the dollar, the dollar and other floating currencies remain constant relative to each other. An improvement in the investment climate in Europe during the adjustment period would generate an immediate depreciation of the euro relative to the dollar. In real terms, the dollar and the floating currencies will eventually have to depreciate relative to the managed currencies. But most of the adjustment in the US trade account will come as US absorption responds to increases in real interest rates.

Notes:

Print version record

November 2005.