Department of Economics
Master of Arts
In this paper, the writer develops and estimates a synthesis of the monetary and the portfolio-balance approaches of exchange rate determination in an attempt to explain the dollar's recent depreciation. Since 1985, the U.S. dollar has declined against the German deutsche mark and the Japanese yen. Different explanations have arisen as to the cause of the dollar's depreciation. Some economists blame U.S. monetary policy makers for flooding the world with dollars. Others ascribe fault to fiscal policy makers for not being able to bring the budget and current account deficits under control. And still others attribute most of the U.S.'s economic problems to its continuing deterioration of industrial competitiveness. The empirical results of this study suggest that the current account played the most prominent role in the dollar's recent decline. To strengthen the dollar, U.S. current account deficits must be reduced. Therefore, economic policy must increase domestic savings and lower the budget deficit.
Stagg, Ricky, "An Empirical Investigation into the Causes of the Dollar's Decline (1985-1993)" (1996). Masters Theses & Specialist Projects. Paper 861.