Results from numerical exercises developed in joint work with Martin, and Pesenti, suggests that closing the US current account deficit (from 5% of GDP to zero) could lead to a combination of lower US consumption (-6%), and higher US employment (+3%), relative to trend. This would then correspond to a rate of real dollar depreciation of the order of 20% – close to what we have experienced so far.
The San Diego journalist is not:
The dollar is now the economic equivalent of the Blue Light Special, and we all know what happened to K-mart. I sit here not as an economist or a student of the economy, but as an American reporter of business matters and the stock market who tries to simplify things — and from my vantage point the falling dollar has done little more than make the U.S. the discount mall to the world.
The economist, Giancarlo Corsetti of the European University Institute in Florence, does caution that he has no idea what the short-term direction of exchange rates will be. He just thinks the dollar has already dropped enough to, over time, get rid of the current huge imbalance between imports and exports. Meanwhile, the journalist, Herb Greenberg, is “at a loss to understand why [a weak dollar] should be such a good thing.”
On the one hand you want the dollar to move closer to being correctly priced against other currencies, which is what Corsetti is talking about. But you don’t want its correct price relative to other currencies to keep dropping, because that’s a sign of economic weakness, which is what my buddy Herb is talking about. I guess the real question is: Which form of dollar weakness is Gisele Bündchen talking about?