The Desirability of a Dollar Appreciation, Given a Contractionary U.S. Monetary Policy

Jeffrey A. Frankel

NBER Working Paper No. 1110 (Also Reprint No. r1053)
Issued in April 1983
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

Undesirable real effects have been attributed to floating exchange rates in general, and the 1980-83 appreciation of the dollar in particular.In the appreciating country, the U.S., export industries lose competitiveness and so output falls. In the other country, say Europe, the exchange rate change worsens inflation.This paper starts from the premise that these undesirable side effects are attributable, not to the exchange rate, but rather to the decisionin the U.S. to switch to a more contractionary monetary policy in order to fight inflation. Given the U.S. contraction, it might be desirable for the dollar to appreciate in the sense that it allows each country to attain the best possible tradeoff between aggregate output and inflation.This conclusion follows from the assumption that in each of two sectors,nontraded goods or exportables, the relationship between output and inflationis concave. A U.S. contraction will then give the maximum reduction ininflation per lost output only if it is shared equally by both sectors.This means allowing the currency to appreciate; under a fixed exchange rate the burden of contraction would be borne disproportionately by the nontraded goods sector. The exchange rate change is also good for Europe. Given the U.S. contraction, the European export sectors would suffer a disproportionate loss in output if European currencies were not allowed to depreciate against the dollar.

download in pdf format
   (266 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1110

Published: "Desirability of a Currency Appreciation, Given a Contractionary Moneyart Policy and Concave Supply Relationships." From Journal of International Economic Integration, Vol. 3, pp. 32-52, (Spring 1988).

Users who downloaded this paper also downloaded* these:
Frankel and Rockett w2059 International Macroeconomic Policy Coordination When Policy-Makers Disagree on the Model
Sarris EC-US Agricultural Trade Confrontation
Obstfeld and Rogoff w7777 The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?
Glaeser and Mare w4728 Cities and Skills
Eccles, Ioannou, and Serafeim w17950 The Impact of Corporate Sustainability on Organizational Processes and Performance
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us