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The Swinging dollar: is Europe out of step ?

Author: Wyplosz, Charles INSEAD Area: Economics and Political Science In: Economics of the dollar cycle - Gerlach, Stefan;Petri, Peter A. - 1990 - Book Language: EnglishDescription: p. 299-335.Type of document: INSEAD ChapterNote: Please ask the Library for this chapter.Abstract: The paper takes a European view of the dollar fluctuations of the last decade, often seen as a classic case of lack of coordination. It makes five points. First, the two "countries" interdependence is quite limited as far as trade and income flows are concerned. Second, on the contrary, financial interdependence is intense. Third, and consecutively, Europe has little incentive to stabilize its terms of trade vis à vis the US and would rather attempt to stabilize its real interest rates. Fourth, if the US take the initiative of a sharp change in its policy mix, it is by no means obvious that Europe's best course of action is to reciprocate if the US may then react. Fifth, as Europe is not a single country, the asymmetry between strong and weak currency countries allows the former to control their interest rates and leaves the latter in a more exposed situation. The conclusion is that Europe is not likely to be willing to take much action to solve the existing imbalances for the sake of helping out the U
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The paper takes a European view of the dollar fluctuations of the last decade, often seen as a classic case of lack of coordination. It makes five points. First, the two "countries" interdependence is quite limited as far as trade and income flows are concerned. Second, on the contrary, financial interdependence is intense. Third, and consecutively, Europe has little incentive to stabilize its terms of trade vis à vis the US and would rather attempt to stabilize its real interest rates. Fourth, if the US take the initiative of a sharp change in its policy mix, it is by no means obvious that Europe's best course of action is to reciprocate if the US may then react. Fifth, as Europe is not a single country, the asymmetry between strong and weak currency countries allows the former to control their interest rates and leaves the latter in a more exposed situation. The conclusion is that Europe is not likely to be willing to take much action to solve the existing imbalances for the sake of helping out the U

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