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The Unloved Dollar StandardFrom Bretton Woods to the Rise of China$
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Ronald I. McKinnon

Print publication date: 2012

Print ISBN-13: 9780199937004

Published to Oxford Scholarship Online: January 2013

DOI: 10.1093/acprof:oso/9780199937004.001.0001

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Exchange Rates and Trade Balances under the Dollar Standard

Exchange Rates and Trade Balances under the Dollar Standard

Chapter:
(p.100) Chapter 7 Exchange Rates and Trade Balances under the Dollar Standard
Source:
The Unloved Dollar Standard
Author(s):

Hong (Helen) Qiao

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199937004.003.0007

This chapter considers the impacts of discrete exchange rate changes in open economies with net foreign exchange liabilities and assets under the dollar standard. The combination of wealth, price, investment, and indirect investment effects (when present) increases the complexity of predicting current-account movements following exchange rate changes, which in many cases lead to ambiguous results. For instance, currency devaluation may well improve the trade balance of a debtor economy by depressing domestic absorption, whereas an appreciation has an ambiguous effect on the trade balance of a creditor economy. Because exchange rate changes can no longer be separated from domestic price-level and absorption effects, except in special cases, they cannot be used predictably to adjust the trade balance.

Keywords:   exchange rate changes, globalized investment, absorption, wealth effects, trade balance ambiguity

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