links for 2007-11-05
Why Oh Why Can't We Have a Better Press Corps? (Robert Pear of the New York Times Edition)

Simon Johnson on the Dollar

Simon writes:

Simon Johnson's Blog: The Dollar (answering your questions): Many key currencies, including the dollar, have market determined values.  The IMF doesn't try to predict short-run (daily, weekly, monthly etc) movements in market determined exchange rate; that is simply not the business we are in. 

We look over a "medium-term" horizon -- by which we mean 5 years out -- and we analyze where an exchange rate is relative to its medium-term equilibrium value.  When we say that a currency is "overvalued", that means we think that -- over the medium term (but not necessarily over shorter time periods!) -- a currency will likely tend to depreciate.  And when we say a currency is "undervalued" that means -- over the medium term again -- we expect the currency will likely tend to appreciate....

The U.S. dollar has depreciated in real effective terms about 20% since its most recent peak in 2002.  It has also depreciated since the financial turmoil of the summer -- about 3% since the beginning of August.  And at today's exchange rate, we still regard the dollar as overvalued relative to its medium-term equilibrium value -- just remember this is NOT a statement about what the dollar will do today or any time soon!!

With regard to addressing the issue of "global imbalances," which is the term used to describe the large current account deficits and surpluses around the world, we think that exchange rate adjustment -- changes in the value of the dollar and other currencies -- can play a role.  But exchange rates are not the only issue; it's also about appropriately adjusting the balance of savings and investment around the world.  The strategy for doing this was laid out most recently in a set of mutually consistent policy plans known as the Multilateral Consultation.  This framework provides the best way to ensure that adjustment around the world will be orderly and symmetric, i.e., everyone does their part and global growth is sustained.

And there Simon stops, demonstrating a true mastery of IMF-speak. If he weren't working for an organization loathe to criticize its governmental masters in public, he would say that China needs to (a) boost domestic consumption, and (b) let its exchange rate appreciate more rapidly, while the United States needs to (a) boost private savings, and (b) raise taxes.

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