Global Capital, the Exchange Rate, and Policy (In)Effectiveness

Biagio Bossone

No PKWP2113, Working Papers from Post Keynesian Economics Society (PKES)

Abstract: In line with JMK’s liquidity preference theory, this article holds that in a world of highly internationally financially integrated economies the exchange rate between any two currencies is determined by the financial market views as to what its value is expected to be in the future. These views are influenced by the policy credibility that markets themselves attribute to the currency-issuing countries. After briefly reviewing the established theories of the exchange rate, the article proposes a very simple, aggregate model of equilibrium exchange rate determination based on market views and discusses its basic features and policy implications. It shows that whereas macro policy shocks in highly credible countries affect mostly real output with only a moderate impact on the exchange rate, the same shocks in poorly credible countries dissipate almost entirely in exchange rate movements. The exchange rate ultimately reflects the space that markets make available to national authorities for effective macro policies.

Keywords: Credibility; Exchange rate; Global investors and capital; Inflation; Macroeconomic policy (search for similar items in EconPapers)
JEL-codes: F41 F62 G15 (search for similar items in EconPapers)
Pages: 23
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-isf, nep-mac, nep-mon, nep-opm and nep-pke
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://postkeynesian.net/media/working-papers/PKWP2113_v3.pdf First version, 2021 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pke:wpaper:pkwp2113

Access Statistics for this paper

More papers in Working Papers from Post Keynesian Economics Society (PKES) Contact information at EDIRC.
Bibliographic data for series maintained by Jo Michell ().