lains 20% of the variability in the exchange rate. The debt to GDP ratio helps to explain the drop in the early nineties but becomes irrelevant later on in the decade as the ratio decreased yet the dollar continued its slide. Because of this one way impact, I am tempted to associate the debt to GDP ratio not in the structural change argument but rather with irrationality in the foreign exchange market. Paul Krugman puts forth another reason why PPP may not fully explain the change in the exchange rate. Krugman hypothesizes that foreign investors incur sunk costs as soon as they invest in a foreign market. The investor, realizing that exchange rates are variable in the short run, will hold off selling his foreign assets until he or she is sure that the value of the currency has indeed experienced a real depreciation. Such a hypothesis could explain the slow and continued trend downward of the Canadian dollar.The growth in the US over the past has been astonishing. As someone who was born after 1973, it is difficult for me to imagine a sustainable growth rate upwards of 5%. Nonetheless, the data slowly trickling in seems to indicate that US productivity levels have kept up with the income growth thereby rendering it sustainable. It appears that the penny-pinching business practices forced upon firms during the recession of the early nineties as well as the increased use of computers have cleared the way for a new era of economic growth. Despite this advent, the value of the stock market still seems out of control:I realize that the interest rate parity hypothesis should mean that the exchange rate has already incorporated these high returns, as the interest rate is the opportunity cost of money. However because the interest rates in the two countries have tracked each other over the past decade, it is my supposition that this "bubble" in the US stock market has not been fully incorporated into the interest rate. This seems logi...
