War and exchange rate valuation
DOI:
https://doi.org/10.15355/epsj.4.1.62Keywords:
Currency valuation, forecasting, optimum currency areas, warAbstract
This article investigates the extent to which the dominance of the United States dollar as an international currency has been contingent on American diplomacy rather than the prosecution of expensive wars. Four wars are examined, the Korean war (1950-1953), the Vietnam war (1964-1975), the Persian Gulf war (1990-1991), and the Iraq war (2003-present). The historical performance of the dollar is examined in times of war and peace, and the Box-Jenkins forecasting algorithm is employed to make a short-term projection of the dollar coinciding with the Iraq war. The price of gold is used as a measure of the value of the U.S. dollar and investor confidence in the dollar during times of war and peace. The empirical evidence shows a short-term depreciation of the U.S. dollar coinciding with the Iraq war, which is not atypical of the value of the U.S. dollar in a time of war. Problems with the value of the U.S. dollar in times of war lead to the exploration of alternative forms of money, which if very successful, can erode the continued dominance of the U.S. dollar as an international currency.References
Bacchetta, P. and E. Wincoop. 2006. “Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?” American Economic Review, Vol. 96, pp. 552-576.
Cooper, R. 1999. “The Asian Crisis: Causes and Consequences,” pp.17-28 in A. Harwood, R. Litan, and M. Pomerleano, eds. Financial Markets and Development: The Crisis in Emerging Markets. Washington, DC: Brookings Institution Press.
Daniels, J.P. and D.D. Vanhoose. 2005. International Monetary and Financial Economics. Mason, OH: Thomson South-Western.
Dornbusch, R., I. Goldfajn, and R.O. Valdes. 1995. “Currency Crises and Collapses.” Brookings Papers on Economic Activity, Vol. 2, pp. 219-270.
Dudley, L. and P. Passell. 1968. “The War in Vietnam and the United States Balance of Payments.” The Review of Economics and Statistics, Vol. 50, No. 4, pp. 437-442.
Eichengreen, B., A. Rose, and C. Wyplosz. 1995. “Exchange Market Mayhem: The Antecedents and Aftermath of Speculative Attacks.” Economic Policy, Vol. 21, pp. 249-312.
Engel, C. and K.D. West. 2004. “Accounting for Exchange Rate Variability in Present Value Models when the Discount Factor is Near One.” NBER Working Paper No. 10267. Cambridge, MA: National Bureau of Economic Research.
Engel, C. and K.D. West. 2005. “Exchange Rates and Fundamentals.” Journal of Political Economy, Vol. 113, pp. 485-517.
Engel, C., N. Mark, and K.D. West. 2007. “Exchange Rate Models Are Not as Bad as You Think.” NBER Working Paper No. 13318. Cambridge, MA: National Bureau of Economic Research.
Essayad, M. and D. Marx. 2001. “OPEC and Optimal Currency Portfolios.” Oil, Gas, and Energy Quarterly, Vol. 49, No. 2, pp. 363-384.
Frankel, J.A. and A.K. Rose. 1996. “Currency Crashes in Emerging Markets: An Empirical Treatment.” Journal of International Economics, Vol. 41, pp. 351-366.
Gujarati, D. 2003. Basic Econometrics. New York: McGraw-Hill.
Johnston, B. and Y. Sun. 1997. “Some Evidence on Exchange Rate Determination.” IMF Working Paper No. 97/98. Washington, DC: International Monetary Fund [accessed 21 April 2008].
Johnston, J. and J. DiNardo. 1997. Econometric Methods. New York: McGraw-Hill.
Krueger, A. 1983. Exchange Rate Determination. Cambridge, MA: Cambridge University Press.
Krugman, P. 1993. “Recent Thinking About Exchange Rate Determination and Policy.” RBA Annual Conference Volume No. Acv1993-02 [Australia]. http://www.rba.gov.au/
Krugman, P. 1998. “What happened to Asia?” Mimeo. Cambridge, MA: Massachusetts Institute of Technology.
Mark, N.C. 1995. “Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability.” American Economic Review, No. 85, pp. 201-218.
Meese, R.A. and K.S. Rogoff. 1983. “Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample?” Journal of International Economics. Vol. 14, pp. 3-24.
Mishkin, F. 1992. “Anatomy of a Financial Crisis.” Journal of Evolutionary Economics, Vol. 2, pp. 115-130.
Mongelli, F.P. 2008. “European Economic and Monetary Integration and the Optimum Currency Area Theory.” Economic Papers 302. Brussels, Belgium: European Commission.
Mundell, R.A. 1961. “A Theory of Optimum Currency Areas.” American Economic Review, No. 51, pp. 509-517.
Mussa, M. 1981. “Sticky Individual Prices and the Dynamics of the General Price Level.” Carnegie-Rochester Conference on Public Policy, Vol. 15, pp. 261-296.
Obstfeld, M. 1994. “The Logic of Currency Crises.” Cahiers Economiques et Monetaires, Vol. 43, pp. 189-213.
Pindyck, R.S. and D.L. Rubinfeld. 1998. Econometric Models and Econometric Forecasts. New York: McGraw-Hill.
Ricci, L.A. 2008. “A Model of an Optimum Currency Area. Economics, Vol. 2, No. 2008-8, pp. 1-31.
Sachs, J., A. Tornell, and A.Velasco. 1996. “Financial Crises in Emerging Markets: the Lessons from 1995.” Brookings Papers on Economic Activity, Vol. 1, pp. 147-215.
Salvatore, D. 2001. International Economics. New York: Wiley.
Salvatore, D. 1999. “Lessons from the Financial Crisis in East Asia.” Journal of Policy Modeling, Vol. 21, No. 3, pp. 283-287.
Spiro, D.E. 1999. The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets. Ithaca: Cornell University Press.
Stiglitz, J.E. and L.J. Bilmes. 2008. The Three Trillion Dollar War: The True Cost of The Iraq Conflict. New York: Norton.
