Um… why is the Fed pushing this view right now? This sounds a little like a pilot getting on the PA to explain how airplane crashes are good things, “because they reduce airport congestion in the long run… please place your seats in the upright position, stow your belongings, and place your head between your knees…”
Historical evidence doesn’t support the commonly held view that currency crashes are harmful to big economies, according to a Federal Reserve paper.
In fact, as long as they’re not triggered by an outbreak of inflation, crashes can actually have positive economic outcomes including stronger gross domestic product growth, lower bond yields and rising equity prices.
“Sharp exchange rate depreciations, or currency crashes, are associated with poor economic outcomes in industrial countries only when they are caused by inflationary macroeconomic policies,” wrote Joseph Gagnon, visiting associate director of the Fed’s monetary affairs division.
“On the other hand, crashes caused by rising unemployment or external deficits have always had good economic consequences with stable or falling inflation rates,” he wrote in the paper, which had the provocative title: “Currency Crashes in Industrial Countries: Much Ado About Nothing?”
The paper was posted on the Fed’s Web site Tuesday.
Gulp. Batton down the hatches!
via Fed Paper: Currency Crashes Can Have Good Economic Effects – Real Time Economics – WSJ.
