Monday, February 6, 2012

Ben Bernanke should target the dollar/euro nominal exchange rate

Ben Bernanke should announce an explicit target for the dollar-euro nominal exchange rate. One that is substantially below the present parity of about $1.30 to a euro. He would do this by purchasing Italian, Spanish, Irish, and (possibly) Greek debt with open market operations, i.e. by expanding the Fed's balance sheet. This would do several things:

1. More M for the M/P part of M/P* V(i) = Y. Market monetarists will be pleased.

2. We've done all we can do on interest rates; why not target exchange rates? Boost NX instead of I in C+I+G+NX. Keynesians will be pleased.

3. The periphery will recieve a repreive from their looming debt crisis and see a fall in interest costs. Crisis averted.

4. Northern Europe (especially a certain German Chancellor)  will flip out about the "competitive devaluation" and (hopefully) pressure the ECB to return fire, i.e. expand.

It sounds foolish, but it just might be a way for central banks on both sides of the Atlantic to do the kind of expansion the both economies still desperately need.

No comments:

Post a Comment