Goldman Sachs researchers have been hitting the history books again, trying to divine what happens to currencies when economies stagnate. Answer:  Not as much as you might think

Looking at exchange rates for years before and during “stagnation”, Goldman found that year-to-year FX volatility in such periods is lower than in normal periods. But a lot of it depends on the type of stagnation.

First, an average stagnation — a period of sub-par economic growth lasting for at least six years:

On average, the run-up to stagnations (and the early years into an episode) tends to be characterised by moderate FX appreciation. Later on, FX remains flat for a while and gradually assumes a depreciation trend during the last years of stagnation. The average initial appreciation hovers below 5%, while the ultimate depreciation tends to be smaller than 10%.

Next, a “Great Stagnation” — a period lasting for 10 years or more:

The initial appreciation can reach more than 20% (computed from the years prior to the stagnation) and the posterior depreciation can surpass 10 % .

What does this mean? Well is it not particularly good news for the United States.

Although the recent macroeconomic evolution of the U.S. economy lies within the bands of a typical stagnation from the growth perspective, the USD appreciation associated with the evolution of the financial shocks in recent years is well outside the typical FX stagnation paths.