Sunday, May 22, 2011

Plain talk about the dollar

From Obama's former chief economist and now UC Berkeley prof Christina Romer in today's NYT.  Romer carefully explains the basics on supply and demand for foreign currencies and then shows that a rising dollar can be a signal of good economic conditions (e.g., increased innovation leads to greater global demand for US goods and services) or not-so-good conditions (e.g., global financial crisis of fall 2008). 

Amusing anecdote: When preparing for an interview with the President-elect, Romer was being quizzed in a cab by Larry Summers on basic economic policy questions.  Summers asked Romer to talk about the exchange rate.  Romer: “The exchange rate is a price much like any other price, and is determined by market forces.”  Summers: “Wrong! The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

Romer gave the correct answer in terms of economic logic, but Summers gave her the answer she needed to give the President-elect if she wanted to be chief economic advisor. 

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