Christina Romer and the Strong Dollar

Christina Romer has a good piece in the New York Times Economic View column about the economics and politics of the dollar - basically, is a strong dollar a good thing? She does a good job explaining how currency markets set the value of the dollar and why having a strong dollar is more of a political issue than an economic concern. This is definitely a good article for students when discussing exchange rates.

Deflation, Fed Policy and Exchange Rates

The big story has been Ben Bernanke going to bat for Fed policy against both domestic and international critics over QE2. Domestically, the big fear is inflation. But the new inflation numbers (core CPI) show that inflation is at historic lows and going lower. The fear is that the United States is following Japan in into its own lost decade. The chart below from the New York Times shows this clearly.




























China has made it clear that it opposes QE2 because it will lower the value of the dollar, which will make it harder for China to maintain its huge trade surplus. In response to QE2, the Chinese Central Bank has raised its reserve requirements by half a percent (the Chinese Central Bank uses the reserves to buy dollars) which will negate the affect of QE2 plan. This is described in a good article in the New York Times. Here is an example of banking policy affecting exchange rates.

Krugman with the Snow

Paul Krugman has a post where he makes a good use of the Swan diagram to explain how the trade issues between the United States and China affect both economies, and how they could solve each others problems (if China would let them). Here is the diagram. It is a good teaching tool - I wonder why more textbooks do not use it. here is the Wikipedia link with more about the Swan diagram.