Paul Krugman: Exchange Rates and Austerity


 

Brad DeLong saves me the trouble of responding to Alan Reynolds.But I’d like to enlarge on one substantive point.

Quite often, austerians point to some example of a country that engaged in fiscal austerity yet experienced a strong economic recovery,and claim that this is a refutation of Keynesian views. Usually, however — not always, but usually — it turns out that the real story is that these countries experienced large currency depreciations, so that they could have export-led recoveries despite domestic austerity.

Let’s use the BIS data on real effective exchange rates to look at two examples: Korea in the late 1990s, and Iceland more recently. Korea:

Iceland:

Two points: First, for euro area countries that must rely on internal devaluation, real depreciations on this scale would be inconceivable, requiring devastating deflation. Second, the whole advanced world is in a liquidity trap these days — and we can’t all massively devalue against each other.

So invoking cases like these as if they have something to do with the fiscal policy debate is either ignorant, disingenuous, or both.

Exchange Rates and Austerity – NYTimes.com

This entry was posted in Austerity, Macroeconomics, Paul Krugman. Bookmark the permalink.

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