Should-Read: Another good paper on the costs of a strong dollar policy. It is one thing if (as in the 1990s) the strong dollar and the consequent downward pressure on (some) tradable manufacturing is a result of high investment spending in the United States. In those cases the bad effects are cushioned by higher productivity in nontradeables and in sectors of emerging comparative advantage. It is quite another if the decline in investment and manufacturing spring from increased deficits. No, this is not the fiscal expansion we were waiting for: Doug Campbell: Relative Prices, Hysteresis, and the Decline of American Manufacturing: “This study uses new measures of real exchange rates to study the collapse of US manufacturing employment in the early 2000s in historical and international perspective…

…To identify a causal impact of RER movements on manufacturing, I compare the US experience in the early 2000s to the 1980s, when large fiscal deficits led to a sharp appreciation of the dollar, and to Canada’s experience in the mid-2000s, when high oil prices and a falling US dollar led to an equally sharp appreciation of the Canadian dollar. Using disaggregated sectoral data and a difference-in-difference methodology, I find that a temporary appreciation in relative unit labor costs for the US leads to persistent declines in employment, output, and productivity in relatively more open manufacturing sectors. The appreciation of US relative unit labor costs can plausibly explain more than two-thirds of the decline in manufacturing employment in the early 2000s…


Brad DeLong


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