Commentary on 'The Dollar in the 1990s: Competitiveness and the Challenges of New Economic Blocs'

At the risk of oversimplifying and of losing both the subtlety of the argument and the many insights contained in its development, Rudiger Dornbusch's message can be summarized in three major points. First, persistent current account imbalances are evidence of the lack of a (satisfactory) adjustment mechanism in today's world economy. To correct such imbalances from a U.S. perspective requires a massive improvement in the U.S. trade balance and, for that purpose, given foreseeable productivity trends, a large real depreciation of the dollar will have to take place in the 1990s. The real depreciation will have to be the larger if, as should occur, a correction of the U.S. budget deficit takes place. As for monetary policy, it should be eased to maintain full employment aid stable growth. In addition, an aggressive commercial policy that pries open foreign markets, especially the closed Japanese one, should be pursued and, if successful, would help correct the U.S. external deficit significantly. Second, domestic financial market deregulation will increase international capital mobility or, more precisely, the portion of changes in national savings rates that result in changes in the current account rather than in changes in investment. Thus, budget cutting in the United States would result in a significant, though far from one-toone, improvement in the U.S. current account, the counterpart to which will, again, have to be dollar depreciation in real terms. Third, this will not be enough to make what Dornbusch calls "the Japan problem