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Currency turmoil in an unbalanced world economy

Author

Listed:
  • Michel Aglietta

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Virginie Coudert

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

Abstract
The world is once again under threat of currency turmoil ignited by a vigorous appreciation of the dollar against all other currencies. This is the harbinger of another long cycle which has been the pattern of exchange rates since the fall of the Bretton Woods system in 1971. Because dollar cycles are driven by momentum dynamics disconnected from fundamentals, they are likely to distort real effective exchange rates between major currencies. The dollar appreciation phase may also wreak havoc in the financial systems of emerging countries that are heavily indebted in dollars. In the present state of the world economy, the prospect of a new dollar cycle is particularly worrisome since most countries, far from deleveraging after the financial crisis, have massively increased their debt relative to GDP in the non-financial sectors. The rise in dollar debt is due to subpar income growth in the world economy which has precluded deleveraging of the already high level of debt reached in 2007 on the one hand, and to the status of the dollar as the de facto exclusive supplier of international liquidity on the other hand. Because US monetary policy is not bound by any international rules, it has supplied liquidity on its own terms, flooding the world with cheap money in order to revive domestic consumption in the US. The catalyst for renewed dollar appreciation has been the divergence in monetary policy between the US on the one side, Japan until early 2013, and the euro area until late 2014 on the other. Monetary policies in these latter countries, working counter to the US before a recent change in course, have created deflation risks that the new trend of dollar appreciation compounded with the slump in the price of oil is expected to correct, spreading the recovery worldwide. However, this is the benign scenario. History would suggest the possibility of a much more unpleasant outcome. Misalignment in exchange rates is a repeated feature of dollar cycles, as much as unsusta
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Michel Aglietta & Virginie Coudert, 2015. "Currency turmoil in an unbalanced world economy," Post-Print hal-01410654, HAL.
    • Handle: RePEc:hal:journl:hal-01410654
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    References listed on IDEAS

    as
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    4. Michel Aglietta & Étienne Espagne, 2015. "Financing energy and low-carbon investment: public guarantees and the ECB," CEPII Policy Brief 2015-06, CEPII research center.
    5. Christophe Destais, 2016. "Central Bank Currency Swaps and the International Monetary System," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(10), pages 2253-2266, October.
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    8. Michel Aglietta & Etienne Espagne, 2015. "Financing energy and low-carbon investment: public guarantees and the ECB," Working Papers hal-01671394, HAL.
    9. Natacha Valla & Jesper Berg & Laurent Clerc & Olivier Garnier & Erik Nielsen, 2015. "A holistic approach to ECB asset purchases, the Investment Plan and CMU," CEPII Policy Brief 2015-07, CEPII research center.
    10. Natacha Valla & Thomas Brand & Sébastien Doisy, 2014. "A New Architecture for Public Investment in Europe," CEPII Policy Brief 2014-04, CEPII research center.
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    Cited by:

    1. Michel Aglietta & Virginie Coudert, 2016. "Trump and the Dollar in the Refection of History," Working Papers hal-01671414, HAL.
    2. Michel Aglietta & Guo Bai, 2016. "China’s 13th Five-Year Plan. In Pursuit of a “Moderately Prosperous Society”," CEPII Policy Brief 2016-12, CEPII research center.
    3. Etienne Espagne, 2016. "Climate Finance at COP21 and After: Lessons Learnt," CEPII Policy Brief 2016-09, CEPII research center.
    4. Matthieu Crozet & Gianluca Orefice, 2017. "Trade and Labor Market: What Do We Know?," CEPII Policy Brief 2017-15, CEPII research center.
    5. Xavier Chojnicki & Anthony Edo & Lionel Ragot, 2016. "Intra-European Labor Migration in Crisis Times," CEPII Policy Brief 2016-13, CEPII research center.
    6. Sébastien Jean & Ariell Reshef, 2017. "Why Trade, and What Would Be the Consequences of Protectionism?," CEPII Policy Brief 2017-18, CEPII research center.
    7. Anne-Laure Delatte & Sébastien Jean, 2017. "Trade and Macro-Economic Issues for International Co-Ordinational in Tense Times," CEPII Policy Brief 2017-16, CEPII research center.
    8. Cecilia Bellora & Sébastien Jean, 2016. "Granting Market Economy Status to China in the EU: An Economic Impact Assessment," CEPII Policy Brief 2016-11, CEPII research center.
    9. Michel Aglietta & Guo Bai, 2016. "China's 13th Five-Year Plan. In Pursuit of a "Moderately Properous Society"," Working Papers hal-01671415, HAL.
    10. Hillel Rapoport, 2017. "Who is Afraid of the Brain Drain? A Development Economist’s View," CEPII Policy Brief 2017-14, CEPII research center.

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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