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Productivity and the Euro-dollar Exchange Rate
Giancarlo Corsetti
(European University Institute and CEPR)
www.iue.it/Personal/corsetti
Dallas FED, May 2004
The euro-dollar exchange rate
In the first five year of the European currency, we have
already witnessed a sizeable exchange rate swing.
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The size of the swing
• The minimum value of the euro-dollar exchange rate was 0.825
(October 2000); the maximum value was 1.285 (February
2004)
• Historically:
– The D-mark fluctuated between (approximately) 0.60 and
1.40 dollars.
– The value of the Japanese yen has fluctuated in the range
80-140 yen per dollar.
Questions
• The prolonged US boom in the 1990s has been associated with
large productivity growth differentials, real dollar appreciation,
trade deficits and the build up of large external stock of net
liabilities vis-à-vis the rest of the world.
• The euro was born at the peak of this extraordinary period.
According to many, its initial slide vis-à-vis the dollar was to a
large extent a reflection of US economic strength.
• To what extent is the dollar depreciation since 2002 a reflection
of less optimistic expectations about US productivity and
growth relative to the rest of the world?
(as opposed to US internal and external debt imbalances?)
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In what follows
• I will reconsider the link between productivity and
exchange rates, both empirically and according to our
economic models.
•
I will argue that the experience of the 1990s has unveiled
surprising and important features of the international
transmission mechanism.
• I will end with some considerations on the effect of swings
in the dollar exchange rate within the euro area.
Growth and exchange rates
a popular model in the 1990’s
• Explaining exchange rates is a challenge for economists.
• At times ‘popular’ models emerge among policy makers and
practitioners.
•
In the second half of the 1990s, a popular model attributed the
strength of the dollar to differences in (productivity) growth
between the USA and the