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Joseph Stiglitz, Aaron Edlin, and J. Bradford DeLong

Print publication date: 2011

Print ISBN-13: 9780231143653

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231143653.001.0001

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Divergent Views on the Coming Dollar Crisis

Divergent Views on the Coming Dollar Crisis

(p.39) Chapter 5 Divergent Views on the Coming Dollar Crisis
The Economists' Voice

J. Bradford DeLong

Columbia University Press

This chapter sets out the two contrasting views among economists on the likely consequences of America's huge current account deficit. Domestically oriented macroeconomists see a forthcoming fall in the value of the dollar not as a crisis but as an opportunity to accelerate growth. International finance economists, on the other hand, see a financial crisis as likely, followed by a painful and perhaps prolonged recession in the United States. When international finance economists sketch this scenario, domestically oriented macroeconomists respond that it sounds like a case of incompetent monetary policy. Why should the Federal Reserve allow long-term interest rates to spike just because other central banks have ceased their dollar-purchase programs? Should not the Federal Reserve step in and replace them with its own purchases of long-term U.S. Treasury bonds, thereby keeping long-term interest rates at a level conducive to full employment? To this, international finance economists respond that the Federal Reserve will not wish to do so. When forced to choose between full employment and price stability, the Federal Reserve will choose price stability because its institutional memory of the 1970s, when inflation ran rampant, remains very strong.

Keywords:   US economy, macroeconomic policy, current account deficit, economists, US dollar, monetary policy, interest rates, Federal Reserve, price stability

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