Exchange rates

Paul Krugman suggests that exchange rates might matter for economic performance here.

On Ireland and exchange rates, one could add that, because of our large trade exposure to non-Eurozone markets, we  benefitted from an unusually large nominal depreciation in 2014-15 (which translated into a substantial real depreciation) (slides 8 and 9 here). I doubt this is unrelated to the employment boom we have enjoyed since then.

9 replies on “Exchange rates”

I would add a reminder that the UK got its depreciation in early and that, far from being simply a sign of weakness, has supported and minimised disruption to economic activity quite significantly, with the appropriate time lag. Note the recent reversal, apply time lag.

From K-dude:

“When big adjustments in a country’s wages and prices relative to trading partners are necessary, it’s much easier to achieve these adjustments via currency depreciation than via relative deflation — which is one main reason there have been such big costs to the euro.

But many economists remain deeply unwilling to accept this point. ”


If people who don’t understand that are “economists” then what is the worth of the term?

I’ve made the point on here before that movements in foreign exchange rates are an easier, quicker, less socially divisive way to adjust costs in an economy than that of an ‘internal devaluation’ which always favours those most able to exert pressure to resist the adjustment and force it to be mainly applied to weaker, less influential groups. It also reduces local currency property price volatility.

Exchange rates may help individual countries but not everyone in a low growth future. Demand is still the issue. The UK looks good but productivity is stagnant and a lot of new jobs are low paid.

“Paul Krugman suggests that exchange rates might matter for economic performance here.”

Here is a contrarian view. None of that Keynesian stuff

” [b]When every country in the world debases their currency in order to boost exports the USD appears strong. It’s like being the best looking horse in the glue factory. [/b],

The problem for the Fed and the mega-corporations in the S&P 500 is that a strong dollar makes our exports much more expensive to foreigners and reduces their profits from their overseas markets. You won’t see the talking heads on CNBC, Fox, or CNN truthfully analyzing the impact of a 25% increase in the value of the dollar. But it seems the buyback happy CEO’s of the S&P 500 conglomerates have used the strong dollar as their excuse de jour for their profits falling. “

@grumpy, seafóid

Politically, the union failed to act as a union.

The power of the collective with an exchange rate strategy is a higher peak from any systems approach.

Who would the losers have been?

Without laying any claim to a technical knowledge of the data underpinning the various comparisons made in both links, the most striking point for me is that Ireland simply does not behave in any form of lock-step with with the other three countries that could be said to have fallen out of the bed. This would suggest that not too much reliance can be placed on comparisons based on economic models (the validity of all of which appears to be a matter of academic dispute) cf.

Colm McCarthy on where Ireland stands (with many of the points made coinciding with those made in your second link).

Incidentally, this extract deals with the perennial point under discussion as to what a “proper” single currency/monetary union/ fixed exchange regime etc. etc. should look like.

“If there was an unconditional lender-of-last-resort to both banks and government, the costs of a renewed financial crunch would be ameliorated. The reforms to the eurozone since the crisis struck in 2008 have yet to create such a regime: until the eurozone is re-engineered as a full monetary union, member states will have to rely on their own capacity to borrow should things go wrong. Countries in a poorly designed common currency zone need to exercise caution in macroeconomic policy. The higher their external debts and the greater their exposure to economic volatility the more caution is warranted.”

That “member states will have to rely on their own capacity to borrow should things go wrong” is, to take a modern phrase, a feature and not a bug of the euro system as it now stands. With the present stage of European political integration, it is an essential feature which the creditor countries have zero intention of agreeing to alter, precisely because they wish to see caution prevail.


So the narrative is that ‘with the present stage of European political integration’ there could not be a stable design, a monetary union, so they chose an unstable design, a common currency area?

Which implies that the instability is a design feature, not a bug. The mismanagement is just a bonus.

@ CMcC

That is a misreading of what I said. To put it in another way, the view of governments running economies that can cope with the euro, and gain the benefits of sharing a currency, is that correct economic management is a sine qua non for the successful implementation of a common/single currency/ fixed exchange regime – call it what you will – and such correct management can only be achieved at the level of the sovereign governments, as experience has repeatedly shown, even if some have to be chivvied into it. Furthermore, it is more than doubtful that governments in general wish to cede this responsibility to “Brussels”.

In my view, any attempt to do so would lead to the collapse of the EU as the responsibility for fundamental economic decisions must carry with it effective political responsibility which can only be organised at a sovereign level.

Like it or not, that is the way the system is operating at its current level of design. There is no lack of stability – or benefits – for those countries capable of keeping up.

@ CMcC

And for countries that are not capable of keeping up, one has the changes agreed with regard to how they are, and may be in the future, bailed out. The recent exchanges between the members of the Economic and Monetary Affairs Committee of the EP and Dijsselbloem/Regling spell out the underlying political realities. The purse strings remain firmly in the hands of national parliamentarians and are likely to stay there.

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