The Process by Which the Dollar Will Fall: The Effect of Forward-Looking Consumers

36 Pages Posted: 15 Jul 2009

See all articles by Karlygash Kuralbayeva

Karlygash Kuralbayeva

University of Oxford - Lincoln College

David Vines

University of Oxford - Balliol College - Department of Economics; Australian National University (ANU); Centre for Economic Policy Research (CEPR)

Date Written: June 2009

Abstract

This paper extends the analysis of the forthcoming fall in the dollar by Blanchard, Giavazzi and Sà 2005), using a model which incorporates forward-looking consumers. It provides additional underpinnings for the idea of a rapid adjustment in the value of the dollar. We analyze what will happen to the dollar value when forward-looking consumers, in anticipation of the reduction in the current account deficit, cut their consumption. We show that the real interest rate must fall as a result, and that this causes the exchange rate to fall more initially. However we also show that the interest rate does not fall greatly initially, and so that these effects are not large. But they add to pressures causing a rapid fall in the dollar.

Keywords: imperfect substitutability, Net foreign assets, valuation effects

JEL Classification: F32, F41, G15

Suggested Citation

Kuralbayeva, Karlygash and Vines, David, The Process by Which the Dollar Will Fall: The Effect of Forward-Looking Consumers (June 2009). CEPR Discussion Paper No. DP7325, Available at SSRN: https://ssrn.com/abstract=1433921

Karlygash Kuralbayeva

University of Oxford - Lincoln College ( email )

Oxford
United Kingdom

David Vines (Contact Author)

University of Oxford - Balliol College - Department of Economics ( email )

Manor Road
Oxford, OX1 3BJ, Oxfordshire OX13UQ
United Kingdom
+44 1865 271 067 (Phone)
+44 1865 271 094 (Fax)

Australian National University (ANU)

Canberra, Australian Capital Territory
Australia

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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