When things stagnate

October 25, 2011

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.

 

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  • About Jeremy

    "Chief Desk Editor, Economics & Markets, based in London. Previously European Investment Correspondent, Bureau Chief for Greece and Cyprus in Athens and Senior Correspondent for the European Union in Brussels. Began career covering U.S. politics in Washington D.C."
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