Having said in an earlier post that it is unlikely
that there will be a plunge of the dollar or of any other
of the big three currencies (what constitutes a plunge
is obviously a matter of debate), let me note that it is
not totally impossible. Indeed, in Chapter 16 of the
1991 edition of my _From Catastrophe to Chaos: A
General Theory of Economic Discontinuities_ I discussed
exactly such a case involving the dollar and a possible
European currency. My discussion actually drew on some
work of Paul Krugman, one of the places where he actually
did something more or less original.
The story is that it is not hard to have nonlinear
demand curves for currencies with multiple equilibria
resulting. Thus, it is possible for the system to jump
discontinuously from one basin of attraction to another
at a certain point, with the result being a very sudden and
sharp change in the relative values of the currencies.
The obvious mechanism in this case would be a sudden
shift from using the dollar as a major reserve currency and/or
medium of exchange for international trade transactions
to using the euro.
However, I do not think such a shift is likely at this time.
Possible, but not very likely. So, I think we are more likely
to see the usual "swinging" behavior. The euro went down,
too far down, so now it will go up again, too far up.
BTW, although I am giving credit to Krugman, it was
Alfred Marshall who first posited the possibility of multiple
equilibria in foreign exchange rate models.
Barkley Rosser
Professor of Economics
MSC 0204
James Madison University
Harrisonburg, VA 22807 USA
website: http://cob.jmu.edu/rosserjb
also
Incoming Editor, Journal of Economic Behavior and Organization
MSC 5505
James Madison University
Harrisonburg, VA 22807 USA
journal email address (can submit papers there)
[EMAIL PROTECTED]
