Neil Irwin’s column on the border-adjustment tax spurred an interesting debate. Irwin notes that a 25 percent rise in the dollar (or even a somewhat smaller rise) would have an impact outside the United States, as the dollar is a global currency.
Dean Baker and Jared Bernstein note that the dollar moves around a lot without destroying the global economy. The projected moves in the dollar are no larger than the dollar’s 20 percent or so move over the last three years. Baker: “Movements of this size happen all the time. They certainly can cause problems, but the financial system generally deals with it.”
I still worry though. There is a difference between a 20 percent move (off a long-term low) and a 30 or 40 percent move. And there is a difference between normal exchange rate volatility and large, sustained currency shifts. I would note that the 20 percent rise in the dollar in late 2014 and early 2015 contributed to the change in China’s currency regime—and China’s shift to managing against a basket roiled global markets from August 2015 to February 2016. The world survived, but it wasn’t totally smooth.
Let me focus on two specific reasons for concern:
One. Balance sheet mismatches in emerging economies.**
Two. Dollar pegs, or basket pegs heavily weighted to the dollar.