A Symposium Sponsored By The Federal Reserve Bank of Kansas City THE U.S. DOLLAR-- RECENT DEVELOPMENTS, OUTLOOK, AND POLICY OPTIONS A Symposium Sponsored by the Federal Reserve Bank of Kansas City Jackson Hole, Wyoming August 21-23,1985 Contents Foravord .............................................. v The Contributors ........................................vii The Moderators .........................................xi Robert Roosa Walter Heller 1. Gauging the Evidence on Recent Movements in the Value of the Dollar, Richard M. Levich .............. 1 Commentary on "Gauging the Evidence on Recent Movements in the Value of the Dollar," Robert 2.Lawrence. 29 2. Causes of Appreciation and Volatility of the Dollar, William H. Branson .................... 33 Commentary on "Causes of Appreciation and Volatility of the Dollar," Jacob A. Frenkel .............. 53 3. Effects of the Strong Dollar, Robert Solomon ............... 65 Commentary on "Effects of the Strong Dollar," John S. Fleming .................... 89 4. The International Role of the ~ollar, Otmur Eminger ..................................93 5. Is the Strong Dollar Sustainable?, Paul R. Krugmn ..................................103 Commentary on "Is the Strong Dollar Sustainable?," Michael L. Mussa ................133 iv Contents 6. The U.S. Payments Deficit and the Strong Dollar: Policy Options, Richard N. Cooper. 157 Commentary on"The U.S. Payments Deficit and the Strong Dollar: Policy Options," Paul Craig Roberts . 177 7. Is There a Case for More Managed Exchange Rates?, JefSrey D. Sachs . 185 Commentary on "Is There a Case for More Managed Exchange Rates?," Ronald I. McKinnon. 213 8. Overview Panel C. Fred Bergsten . 227 William Poole . 235 Henry C. Wallich . 241 Symposium Participants . 245 Foreword Early in 1985 the value of the U.S. dollar reached a record high against most foreign currencies. While the strength of the dollar helped to keep the U.S. inflation rate low, it also led to major imbalances in our economy. As a result, many questioned whether the strength of the dollar could and should be sustained. And, if the strength of the dollar was not sustainable, when and by how much should the dollar fall? And, finally, what should be the appro- priate role for monetary and fiscal policy, both here and abroad, in these cir- cumstances? To achieve a better understanding of these concerns about the U.S. dol- lar, we brought together leading authorities from academe, government, and the private sector for a two-day symposium on "The U.S. Dollar - Recent Developments, Outlook, and Policy Options." The symposium, the eighth in a series sponsored by the Kansas City Fed, was held August 21-23, 1985 at Jackson Hole, Wyoming. We hope that the proceedings of this symposium will be of interest to all those wishing to learn more about factors affecting the value of the U.S. dollar. President +&Federal Reserve Bank of Kansas City The Contributors C. Fred Bergsten, director, Institute for International Economics. Dr. Bergsten' is the first director of the Institute for International Economics. Prior to this, he was Assistant Secretary of the Treasury for International Affairs from 1977 to 1981 and Undersecretary for Monetary Affairs in 1981. In those capacities, he had responsibility for U.S. policy in the international monetary, trade, investment, and development areas. Dr. Bergsten also served for three years as Assistant for International Affairs to Henry Kis- singer on the senior staff of the National Security Council, and has been a senior fellow at the Brookings Institution. He has authored several books and numerous articles on a wide range of international and economic issues. Waam Branson, professor of economics and international affairs, Princeton University. A member of the Princeton University faculty since 1966, Dr. Branson is also a senior adviser to the Brookings Panel on Eco- nomic Activity and the Director of Research in International Studies for the National Bureau of Economic Research. Dr. Branson is co-editor of the Journal of International Economics and associate editor of the Review of Economics and Statistics. In addition, he has been a consultant to numerous government and international agencies. Dr. Branson has published numer- ous scholarly articles in international economics. Richard N. Cooper, Maurits C. Boas Professor of International Eco- nomics, Harvard University. Dr. Cooper has divided his career between academic work and government service. He was Undersecretary for Eco- nomic Affairs in the Department of State (1977 to 1981), a consultant to the National Security Council (1969 to 1970), and Deputy Assistant Secretary of State for International Monetary Affairs (1965 to 1966). Before coming to Harvard University, Dr. Cooper was the Frank Altschul Professor of Inter- national Economics at Yale university. He is the author of numerous books and articles in the area of international economics. viii The Contributors , Otmar Emminger, former president, Deutsche Bundesbank. Dr. Emminger was a member of the Board of Governors of the Deutsche Bun- desbank from 1953 to 1979. He served as Deputy Governor and Vce-Chair- man of the Board of Directors. From 1977 to 1979, he served as president of the Deutsche Bundesbank. Dr. Emminger also was International Monetary Fund Executive Director for Germany from 1953 to 1959. He has served in a host of other important international positions, including chairman of the Deputies Committee of the Group of Ten, German Governor of the Interna- tional Monetary Fund, and member of the Board of the Bank for Interna- tional Settlements. He has written extensively in German and in English. John S. Flemming, economic adviser to the governor, Bank of England. Before joining the Bank of England as Head of the Economics Division in 1980, Mr. Flemming had taught economics at Oxford University since 1963 where he also managed the internationally diversified endowment portfolio of Nuffield College. He has published articles in macro and monetary the- ory, capital theory, and public finance, as well as applied topics and a book on inflation. Between 1976 and 1980 he edited the Economic Journal for the Royal Economic Society and earlier was an editor of Oxford Economic Papers and the Review of Economic Studies. Jacob A. Frenkel, David Rockefeller Professor of International Eco- nomics, University of Chicago. A member of the University of Chicago fac- ulty since 1970, Dr. Frenkel has also been a visiting faculty member at the Tel Aviv University, Israel. He is a research associate of the National Bureau of Economic Research, a Fellow of the Econometric Society, and a consult- ant to the International Monetary Fund and the World Bank. Dr. Frenkel is the co-editor of nine books and the author of numerous scholarly articles on international macroeconomics. Paul R. Krugman, professor of economics and management, Massa- chusetts Institute of Technology. Before joining the faculty in 1980, Dr. Krugman was on the faculty at Yale University. He is also a research associ- ate with the National Bureau of Economic Research. He has done consulting work for a number of organizations, including the Bank of Portugal, the National Academy of Sciences Panel on Advanced Technology Competi- tion, and the U.S. State Department on industrial policy. From 1982 to 1983, Dr. Krugrnan served as international policy economist on the Council of Economic Advisers. He has written a number of scholarly publications in the field of international economics. The Contributors ix Robert Z. Lawrence, senior fellow, Brookings Institution. A specialist in international economics, Dr. Lawrence has served as a consultant to the Federal Reserve Bank of New York and to the World Bank, a member of the Special Study on Economic Change by the Joint Economic Committee of the U.S. Congress, and on the Brookings Panel on Economic Activity. He was a professorial lecturer at the School of Advanced International Studies at Johns Hopkins University for three years. Before joining Brookings as a research associate in 1976, he was an instructor at Yale University. He has published a number of papers, reviews, and economic essays. Richard M. Levich, associate professor of finance and international business and chairman of the International Business Program, New York University Graduate School of Business Administration. A member of the New York University faculty since 1975, Dr. Levich is also a research asso- ciate with the National Bureau of Economic Research. In addition, he has been a visiting faculty member at the University of Chicago, Yale Univer- sity, Centre D'Enseignement Superieur des Affaires (France), and the Uni- versity of New South Wales (Australia) and a visiting scholar at the Board of Governors of the Federal Reserve System. Dr. Levich is the author or co- editor of four books and numerous articles in professional journals. Ronald I. McKinnon, Eberle Professor of Economics, Stanford Univer- sity. Dr. McKinnon has been a member of the Stanford economics faculty since 1961. In addition, he has also served as a consultant to many interna- tional organizations and foreign governments, including Colombia, Kuwait, Chile, Uruguay, and Peru. Dr. McKinnon is the author or editor of four books and many articles on the international macroeconomy. Michael L. Mussa, Wdiam H. Abbott Professor of International Busi- ness, University of Chicago. Before joining the faculty of the Graduate School of Business in 1976, Dr. Mussa was on the faculty of the Department of Economics at