(9/21/2015) Exactly 30 years ago, on September 22, 1985, ministers of the Group of Five countries met at the Plaza Hotel in New York and agreed on a successful initiative to reverse what had been a dangerously overvalued dollar.
The International Economy magazine (Winter 2013) asks 16 authorities, “Can Changes in Exchange Rate Valuations Affect Trade Imbalances?” It is referring to the claim in a recent book by Stanford economist Ron McKinnon that pressure on China to let the renminbi appreciate against the dollar is fundamentally misconceived because such a movement in the exchange rate would not reduce China’s trade surplus nor American’s trade deficit. This is part of an old debate that pre-dates the rise of the China trade problem. Ron has long claimed that exchange rates don’t determine trade balances because they are “instead” determined by national saving versus investment. I thought Paul Krugman demolished the argument pretty effectively 25 years ago, with a textbook graph of internal balance versus external balance. But evidently many still fall for the argument (including some of the experts in the TIE symposium). So I try again: