Will There Be a Dollar Crisis?

32 Pages Posted: 24 Aug 2007

See all articles by Paul R. Krugman

Paul R. Krugman

Princeton University - Woodrow Wilson School of Public and International Affairs; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Abstract

Almost everyone believes that the US current account deficit must eventually end, and that this end will involve dollar depreciation. However, many believe that this depreciation will take place gradually. This paper shows that any process of gradual dollar decline fast enough to prevent the accumulation of implausible levels of US external debt would impose capital losses on investors much larger than they currently expect. As a result, there will at some point have to be a 'Wile E. Coyote moment' - a point at which expectations are revised, and the dollar drops sharply. It is much less clear, however, whether this crisis will produce macroeconomic problems.

Suggested Citation

Krugman, Paul R., Will There Be a Dollar Crisis?. Economic Policy, Vol. 22, No. 51, pp. 435-467, July 2007. Available at SSRN: https://ssrn.com/abstract=1007836 or http://dx.doi.org/10.1111/j.1468-0327.2007.00183.x

Paul R. Krugman (Contact Author)

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States
609-258-4570 (Phone)
609-258-2809 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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