Exchange Rates and Trade Balances Under the Dollar Standard

The author argues that forcing creditor countries to appreciate or freely float their currencies is an ineffective strategy for reducing the U.S. trade deficit. To this end, the paper considers impacts of discrete exchange rate changes in open economies with net foreign exchange liabilities and assets. The author finds that wealth, investment, and indirect investment effects (when present) increase the complexity of forecasting current account movements following exchange rate changes, in many cases leading to ambiguous results.