Raghuram Rajan:
The hard landing: The alternative, of course, is that foreign private investors will doubt the resolve of policy makers. Recognizing that policies are not in place to close the current account deficit, they will realize that the dollar will have to depreciate significantly further. They will not wait to see that happen, instead they will sell dollar assets immediately. Paradoxically, this will force the adjustment: interest rates in the United States may spike up to attract back foreign investors and the exchange rate may depreciate more than necessary so that the anticipated appreciation will give investors an additional reason to return to the dollar. As I have argued, if adjustment is forced into the short run it will entail more depreciation, more dislocation, and slower growth than if the adjustment has time to play out. I do not think that this is the most likely scenario. But given its costs in terms of output and employment foregone, we must not dismiss it...
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