The Currency of Last Resort and Free Trade

Lately I have been following The Peterson Institute for International Economics.


It can be characterized as pro free trade, and market oriented [right, Brent?].  It was founded by a guy named Fred Bergsten, a man with a long career in and close to government, as opposed to either business, finance, or academe.  The Institute got the Peterson brand because Pete Peterson gave it a bunch of money.  The place is considered one of the big time think tanks.

As it happens, Bergsten is a leading proponent of the strong dollar as the main cause of any trade imbalances.

His thinking goes like this: a strong dollar is the reserve currency, and thus the “price” of the dollar is relatively the highest price for any currency.

The high priced dollar means that America can buy overseas at a relatively low price for goods, while foreigners have to pay a relative premium for American goods.

Bergsten thinks this is a mixed blessing but balances on the gold/shit scale in favor of gold.  As an aside, I think most economists would say that.

But it has me wondering how much of the trade imbalance is related to the strength of the dollar, and whether there are empirical studies from either the IMF or the central banks or the leading graduate schools of finance?

Assuming there is a relationship, of course, how could a double blind study be managed?  I suspect any study would be entirely computer modeled and be dependent on inputs.

Brent, do you have any insights?

3 Responses

  1. If currency talk floats your boat, take a look at this new post and also the link within it.


  2. Mark, not really my area of expertise, but…

    We are the reserve currency in the world, and as a general rule we don’t try and manipulate it. The last time we tried to talk down the currency was Plaza Accord in 1987, which has been cited as a cause for the Crash of 87. Since then, we have pretty much stuck to a strong dollar policy.

    I am sure that the strong dollar policy negatively affects our trade balance, but how much is anyone’s guess. I am sure there are studies out there that have run simulations, but like I said, it isn’t my bailiwick. Don’t forget that a strong dollar means that we have lower interest rates than we would otherwise have. So you have offsetting economic effects.

    The other thing is that most things aren’t made in only one place any more. A car might be assembled in a factory in the US with parts sourced from Canada, and the electronics sourced from Asia. So calculating the trade effects can be tough.

    Krugman has written a lot of trade and is considered one of the experts on it.

    Liked by 1 person

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