>He said it on the phone to me yesterday. I had the same reaction. He
>acknowledged that the Fed would likely raise rates to stem the dollar's
>fall, which really would make things nasty. But his point was that that's
>not a necessary result of an exchange rate collapse. He said if the Fed was
>willing to accomodate some extra inflation, then the only damage to domestic
>output would come from the "secondary effects" of an adjustment to changes
>in relative prices, which I assume is another way of saying it would take a
>while for exports to respond.
Weird. I'm guessing the "secondary effects" of relative price changes would be the rise in import prices (relative to domestic production). But this almost sounds like he's taking finance to be neutral - as if a country that borrows $1 billion a day to finance a marginal propensity to consume of 110% wouldn't face a problem if the loan supply were cut off.
Doug