A recent NYT article highlighted the fact that international competitiveness (as defined by macroeconomists) depends on not just the nominal exchange rate, but also relative price levels. From Inflation in China May Limit U.S. Trade Deficit by Keith Bradsher:
Inflation is starting to slow China’s mighty export machine, as buyers from Western multinational companies balk at higher prices and have cut back their planned spring shipments across the Pacific.
Or, at least one session’s worth of recent thinking on the topic.
Presiding: Philippe Bacchetta (University of Lausanne)
The autumn of 2010 is in some ways a replay of what we saw last spring. Is what we saw then a guide to what’s going to happen next?
And Barry Eichengreen anticipates with an answer
I guess now we know that the Fed has the tools to prevent deflation.
The Federal Open Market Committee announced today that:
the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.
With the cover page of the Economist [1] [2] worrying about currency wars, and various analysts arguing whether the US can or cannot win such a “war” (see Naked Capitalism for a discussion), I thought it would be useful to see where we now stand, in terms of “competitiveness”, as understood by open economy macroeconomists.
Having earlier reviewed some of the reasons in favor of additional quantitative easing (QE2), I’d like to acknowledge some of the dissenting views.
Frank Warnock, an expert on US capital flows and stocks, has just written a piece for CFR entitled Two Myths About the U.S. Dollar. In it, he examines “two factors that could substantially alter the long-run value of the U.S. dollar: the dollar’s reserve status and the sustainability of U.S. international debt.”
The latest economic data have surely warranted a downward revision in the Federal Reserve’s assessment of near-term economic performance. It therefore might be a good time to review the steps the Fed could take if it wishes to provide further economic stimulus.