AS-AD not quite over

["Peter.Dorman" <23215MGR@xxxxxxx>]

Well, Barkley, maybe not quite the final shot.  First off, there are various
factors that might have offset the "fundamentals" during the exchange rate
episode of 1982-85.  First, South Korea and Taiwan were effectively in the
dollar zone during this period (maybe still are), since their currencies were
closely pegged to the dollar.  (This is an argument I heard from James Tobin.)
Second, there was certainly a major safe haven effect taking place vis-a-vis
Latin America.  And you may well be right about a speculative bubble.  All of
this illustrates the difficulty of using historical examples to prove or
disprove ceteris paribus-type arguments.  But the foreign substitution
argument for a downward sloping AD curve is essentially logical, not
historical. And logically it requires agents to *underrespond* to rising
prices. Indeed, if they *overrespond* (as well they might) the argument also
fails. In summary, I don't think *I* should have the burden of proving that
foreign exchange markets work in any particular way: this is the
responsibility of those who draw downward-sloping AD curves and attribute them
to foreign substitution.  My point is that their implied claims require not
only irrational behavior in the markets, but behavior that is biased in a
particular direction.  And, as a purely rhetorical point, it is exactly those
who should be least disposed to make such claims who have pushed the AS-AD
approach on the rest of us.

Peter Dorman