Thursday, February 2, 2017

DBCFT chatter : What if we pin the dollar forex ?

PK CW "So one way to think of a DBCFT is as a VAT combined with a subsidy for employment of domestic factors of production. The VAT part has no competitive effect, but the subsidy part would lead to expanded domestic production if wages and exchange rates didn’t change.
But of course wages and/or the exchange rate would, in fact, change. If the US went to a DBCFT, we should expect the dollar to rise by enough to wipe out any competitive advantage. After the currency adjustment, the trade effect should once again be nil. But there might be a lot of short-to-medium term financial consequences from a stronger dollar."

But why not lean against the appreciation like the PRC might ?

Would Yellen accommodate a trump  "protectionist " dollar