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February 02, 2009

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The logic doesn't seem that dissimilar from that which led to the formation of the currency blocs in the 30s, no? I get the point about the multiplier for domestic spending being higher, but it's still going to look like beggar-thy-neighbor to whomever is outside the bloc.

The currency bloc question gets complicated. There's some debate over the effect of floating exchange rates on the ability of fiscal policy to get you out of a liquidity trap.

If you assume that capital flows respond only to changes in interest rates and that currency traders have fixed expectations about future exchange movements, then it isn't clear that a buy-USA policy will give you more bang for your buck.

http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/01/buy-domestic-policies-are-individually-irrational-too.html#more

If you don't believe those two things, though, then you're back in the world where protectionism can be good under extreme circumstance, like the ones we're in now:

http://krugman.blogs.nytimes.com/2009/02/02/more-on-protectionism-wonkish/

Krugman is worried about the political consequences of protectionism.

http://krugman.blogs.nytimes.com/2009/02/01/protectionism-and-stimulus-wonkish/

I take his point, but I'm less worried, because I believe that the international institutions we've put together provide a firebreak against destructive trade wars:

http://noelmaurer.typepad.com/aab/2009/02/international-institutions-101.html

Of course, I could be wrong.


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