[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Central Bank had increased the interest rate to try to prevent
the weakening of the euro, it would have made Europe’s
recovery from recession more difficult.
A weak currency will boost exports and reduce imports;
a strong currency has the opposite effect. The United States
has a huge trade deficit. The fall in the value of the dollar over
the past few years will help reduce this deficit by making foreign
goods more expensive for Americans and making
American goods cheaper for foreigners. Thus, if you buy lots
of imported goods, you benefit from a strong dollar. But if you
are a business that sells abroad, your sales suffer from a strong
dollar. If you work for a company that competes against foreign
imports, your company is hurt by a strong dollar. Farmers
therefore may see world demand for American wheat fall
when the dollar appreciates, while consumers enjoy lower
prices for imported electronics goods. Exchange rate movements
create both winners and losers; so, apart from buttressing
macroeconomic stability, a strong dollar has no
grounds to be always preferred.
One additional argument is often made in favor of maintaining
a strong dollar. Foreign investors have lent the United
States huge amounts over the past twenty years. If they think
the dollar will fall in value, they may sell their holdings of U.S.
financial assets. Because the United States has been able to
maintain a high level of investment, despite its low national
savings rate, by borrowing from abroad, these foreign sources
of funds might dry up if the dollar were to weaken. However,
what matters most in attracting foreign investors is not the
level of the exchange rate but the rate of return that these
investors expect to earn; and those returns depend on U.S.
interest rates and the expected rate of dollar depreciation. If
foreign investors expect the dollar to fall, then interest rates
will have to rise to continue to attract foreign investment to
the United States.
Policy Coordination
Net exports provide one of the channels through which economic conditions in
one country affect others. Interest rates provide another linkage. Because of these
connections, the major industrialized economies of North America, Europe, and
Asia meet regularly to discuss global economic conditions and often try to coordinate
macroeconomic policies. The summits of the Group of Eight, or G-8, consisting
of the United States, Canada, Japan, Germany, France, Italy, the United
Kingdom, and Russia provide a forum for discussions of international economic
developments. In recent years, these discussions have included such topics as
the ongoing Japanese recession and policies to end it, the emerging market
economies and the Russian economy, the role of international organizations such
as the International Monetary Fund and the World Bank, and the debt burden of
developing nations.
The argument that countries may gain from coordinating their macroeconomic
policies is best illustrated with an example. Suppose two countries are in recession.
Each contemplates using expansionary fiscal policy to try to speed its return
to full employment. Each realizes, however, that if it expands fiscal policy while
the other country does not, its currency will appreciate. Such appreciation would
have a detrimental impact on the net exports of the country undertaking the fiscal
expansion and negate some of the effect desired from the policy action. But suppose
both countries could agree to undertake fiscal expansions. As their economies
expand, interest rates in both countries will rise, and thus the exchange rate can
remain at its initial level—the fiscal expansions are not offset by a movement in
exchange rate.
POLICY COORDINATION ∂ 789