The VSD (“Very Stable Dollar”)

Is this what we want the Chinese to peg against?

Figure 1: Log real value of US dollar against a broad basket of currencies, 1973M01=0. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED.

Here the short run volatility of the dollar, illustrated.

Figure 2: Month-on-month annualized appreciation of real value of US dollar against a broad basket of currencies. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED, and author’s calculations.

18 thoughts on “The VSD (“Very Stable Dollar”)”

  1. pgl

    Watching what happened with Zion Williamson last night, I decided to look at Nike’s 10-K filing:

    “We are supplied by 124 footwear factories located in 13 countries. The largest single footwear factory accounted for approximately 9% of total fiscal 2018 NIKE Brand footwear production. Virtually all of our footwear is manufactured outside of the United States by independent contract manufacturers which often operate multiple factories. For fiscal 2018, contract factories in Vietnam, China and Indonesia manufactured approximately 47%, 26% and 21% of total NIKE Brand footwear, respectively. We also have manufacturing agreements with independent contract manufacturers in Argentina, India, Brazil, Mexico and Italy to manufacture footwear for sale primarily within those countries. For fiscal 2018, five footwear contract manufacturers each accounted for greater than 10% of footwear production and in the aggregate accounted for approximately 69% of NIKE Brand footwear production.”

    Alright fellows – which of these factories produced those shoes that fell apart and injured the NCAA’s superstar?!

  2. pgl

    Good point but Kudlow has the “solution”. Return to the gold standard where it would take $35 to buy an ounce. What could go wrong?

  3. pgl

    BTW – didn’t the broad index appreciate by a factor of 4 over the last 45 years. Oh wait – that was the nominal value. I see what you are doing – use the real effective exchange rate. How dare you present an honest analysis?

  4. Willie

    Real value of the US dollar? How is that measured? I’m really curious. It could be measured against all kinds of things, but those fluctuate, too. This question is probably making the same point as the graphs. I don’t fully understand what the graphs mean, though.

    1. Menzie Chinn Post author

      Willie: Consider the following question. When you buy a Treasury Inflation Protected Security (“TIPS”), what is the yield adjusted by? Well, it’s the CPI. Similarly, the “real” value of the US dollar reported by the Fed is CPI deflated.
      It’s possible to adjust by other deflators — GDP deflator, unit labor costs, PPI, etc. But the CPI deflated is by far the most common. See this survey.

      1. Barkley Rosser

        Presumably this is the trade-weighted forex rate, Menzie?

        As it is,wow, it looks like President must be doing something right, given that the current rate is near its long term average. He should be bragging about this rather than how his revised NAFTA is the greatest rrade agreement ever agreed to.

        1. Menzie Chinn Post author

          Barkley Rosser: Yes, this is a trade weighted index, often called an “effective exchange rate”. It *is* close to its average value, but then the Houthakker-Magee (REStat, 1969) finding suggests that the equilibrium (from a NX perspective) should be trending downward…

          1. don

            I wonder if the downward trend will continue, given fracking and the effect on U.S. oil imports. I also wonder if that could be part of the story of what is happening to German exports – loss in exports to countries that were big oil exporters, including Russia…

          3. Moses Herzog

            @ Menzie
            Menzie, I was kind of wandering around online to get a grip on some of this stuff, and you want to know some “Useless trivia” I found?? Sure to be a hit at your next engagement at a bar or beer garden. Did you know President Obama’s father worked for Houthakker as a research assistant at Harvard??

            So try this one on next time you go to the beer garden with your economist brethren “What USA President’s father worked as a research assistant for Hendrik Houthakker??” I bet there will be much gnashing of teeth and straining of forehead muscles on that one and you will be able to grin widely giving them the answer after their 3rd wrong guess.

      2. Willie

        This makes some sense. There’s a complex web of productivity gains or losses, inflation, economic growth, changes to what we buy or don’t buy, and a whole lot of other things I’m not thinking of for the time being. They all have an effect. it makes your original point, really. Tie anything to what? There’s always an alternate to way to think about it, especially to us untrained outhouse economists.

  7. Moses Herzog

    @ Menzie
    I’m still kind of taking this in, but has anyone checked to see if Houthakker-Magee applies for Japan or Germany?? I’m wondering if Houthakker-Magee could be connected to domestic companies “farming out” factory work or jobs to cheaper labor—which I think you would find to be more common in countries like Japan and Germany. For example Japanese cars and Japanese electronics. At one point you could count on those things being made in Japan—now, similar to America, they “farm out” the jobs to cheaper labor in other countries.

    If Germany and Japan’s numbers match up more closely to the USA’s Houthakker-Magee “phenomena” closer than other countries, I would think you would have to make a connection there to the “farming out” of labor to other countries

  8. Moses Herzog

    @ Menzie
    I’m trying to think of the answer here on Houthakker-Magee. I’m wondering if it could be just simply explained by decreasing returns on marginal efficiency?? I mean, if a country like China adopts a new technology, it might be more apt to make jumps in efficiency by “leaps and bounds” yeah?? In the last 20 years the progressions in technology (and therefor efficiency) in countries such as China has been dramatic. Whereas, in America, the progression in technology (and therefor efficiency) are more apt the be the steady/consistent but the “baby steps” kind of efficiency progress (and therefor lowering of per unit supply cost is much slower). (???)

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