This is another static textbook story that can go blooey because of expectations. I would remind you of what happened when Big Al raised interest rates back in 1994. Rather than going up the US dollar fell. Probable reason: expectations of further interest rate increases which would lower the value of bonds. The opposite might happen now with an interest rate cut. Barkley Rosser On Thu, 17 Sep 1998 08:17:02 -0700 James Devine <jdevine at popmail.lmu.edu> wrote:
> Chris writes: >My understanding is that these hints, which Greenspan cannot
> confirm, are significant for the strategy I quoted from the Financial Times
> a week or two ago: a lower dollar interest rate implies an acceptance of a
> larger dollar trade deficit, and the generous willingness of the US to
> import billions of dollars worth of goods free produced by the rest of the
> world, in return for printing less valuable dollars. <
>
> >No?<
>
> If US interest rates fall, then so will the value of the dollar. This would
> make the US balance of trade (and on the current account) shrink. This
> would broadcast recession to the rest of the world, despite its longer-term
> effect of stimulating US aggregate demand.
>
> If most interest rates in the world fall in step (as with the G-7
> coordination scenario that Greenspan says isn't happening), on the other
> hand, the dollar wouldn't change much. So there would be the effect of
> stimulating aggregate demand all over the world.
>
> No?
>
> Jim Devine jdevine at popmail.lmu.edu &
> http://clawww.lmu.edu/Departments/ECON/jdevine.html
> "Forgive me when
> my instincts start stinking;
> I'm easily led
> when my little head
> does the thinking."
> (Bill's song, lyrics by John Hiatt.)
-- Rosser Jr, John Barkley rosserjb at jmu.edu