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Working Paper 1992-006B

"Currency Appreciation and 'Deindustrialization': A European Perspective"
by John A. Tatom

During the 1980s, policy advisers were successful in promoting the view that movements in the value of the dollar have an inverse relationship to U.S. international competitiveness. This article explains their hypothesis, as well as the counterargument that exchange rates positively reflect a country?s competitiveness. Economic policies that boost competitiveness also raise the value of the domestic currency. The mirror image of these hypotheses apply to U.S. trading partners, including Europe. The evidence indicates that European countries were not ?deindustralized? from 1985 to 1990, when the ECU rose in value by more than the dollar had risen in 1980-1985. Instead, European competitiveness rebounded strongly in the late-1980s, reversing the stagnant performance of the
early-1980s. Similarly, during the early-1980s, when the United States was, on one unsupported view, deindustralizing, European nations generally did not enjoy a surge in their share of output or capital formation. Instead, they suffered from ?Euroscierosis.

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Category > International
Category > Monetary Policy/Macroeconomics
Research Papers and Publications: JEL Code > F21
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