Market participants attribute higher dollar premium to both demand and supply factors. On the demand side, Japanese investors have shifted part of their portfolios into foreign currencydenominated assets following the QQE, which has boosted demand for dollars in the foreign exchange swap market.
I will first provide a few examples of how economic principles and economic research, rather than having misled us, have significantly enhanced our understanding of the crisis and are informing the regulatory response. However, the crisis did reveal some gaps in economists’ knowledge that should be remedied.