Why is the Dollar so High?

17 Pages Posted: 27 Jun 2007 Last revised: 20 Jul 2007

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: May 2007

Abstract

The level of the dollar is part of a complex general equilibrium system. Nevertheless, it is helpful to recognize that the high level of the dollar is necessary to generate the current account deficit equal to the difference between national saving and investment. Understanding the high level of the dollar therefore requires understanding the reasons for the low level of national saving in the United States. Reducing the large current account deficit will require both a higher rate of national saving and a more competitive dollar. Although the necessary decline in the real value of the dollar can in theory occur without a decline in the dollar's nominal value, the implied magnitude of the fall in the domestic price level is implausible. A decline of the real value of the dollar that is large enough to reduce the current account deficit significantly requires a significant decline in the nominal value of the dollar.

Suggested Citation

Feldstein, Martin S., Why is the Dollar so High? (May 2007). NBER Working Paper No. w13114, Available at SSRN: https://ssrn.com/abstract=988925

Martin S. Feldstein (Contact Author)

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