International Investors, the U.S. Current Account, and the Dollar
with Olivier Blanchard, MIT, and Francesco Giavazzi, Universita Commerciale Luigi Bocconi and MIT
in Brookings Papers on Economic Activity, 1:2005
A simple model of exchange rate and current account determination is used to interpret the recent behavior of the U.S. current account and the dollar and explore what may happen in alternative future scenarios. The model’s central assumption is imperfect substitutability not only between U.S. and foreign goods but also between U.S. and foreign assets. The recent behavior of the U.S. current account and the dollar exchange rate can be explained by an increase in U.S. demand for foreign goods and an increase in foreign demand for U.S. assets. We show that both shifts imply an eventual depreciation of the dollar, a phase in which the U.S. appears to have entered. How much more depreciation is to come and at what rate depends on how far the process has come and on future shifts in the demand for goods and for assets. We anticipate that, in the absence of surprises, more dollar depreciation will come at a slow but steady rate. The model is used to discuss what will happen if surprises take place. We consider a number of alternative scenarios, from the abandonment of the renminbi’s peg against the dollar, to changes in the composition of reserves held by Asian central banks, to changes in U.S. interest rates. To determine how much of the dollar’s future depreciation is likely to occur against the euro, and how much against Asian currencies, we extend the model to allow for four countries: the U.S., the euro area, Japan and China. We conclude that the path of adjustment is likely to be associated with an appreciation of Asian currencies, but also with a further appreciation of the euro against the dollar.
The 35-Hour Workweek in France: Straightjacket or Welfare Improvement?
with Marcello Estevao, IMF
in Economic Policy, Issue 55, July 2008
Workweek reduction laws may be beneficial if market interactions do not fully take into account the preferences reflected in declining secular trends in working hours. The most recent law in France shortened the workweek from 39 to 35 hours in 2000 for large firms and in 2002 for small firms. Analyzing differences between employees in large and small firms before and after the law, we find that aggregate employment was unaffected but labor turnover increased, as firms shed workers who became more expensive. Survey responses indicate that the welfare impact of the law was different across groups of workers: women but not men may have benefited from coordination to a shorter workweek, and there is also evidence of negative welfare effects for managers, possibly due to the law’s administrative burden.