Sunday, February 23, 2014

Brian Romanchuk — Why Rich Countries Should Float Their Currencies

This article provides more depth to some comments I made in"MMT and Constraints". I explain why developed countries should allow their currencies to float, which is the policy stance advocated by Modern Monetary Theory (MMT). It is probably a good idea for developing countries to float their currencies as well, but they face inherently difficult policy problems that I do not know enough about to comment on. The implication of advocating a free-floating currency is that I do not see the "external constraint" as being a serious issue, or at least an issue that policy makers can hope to do anything useful about.

In that previous article, I made some quick comments in response to an assertion by Thomas Palley that the "foreign exchange market constraint" is very important for countries other than the United States. Since he did not explain that assertion, I was unable to offer a very detailed criticism. My response was too short, and drew some comments. I expand my explanation here.

I will first explain why I do not think that there is a significant external behavioural constraint on policy makers; but an accounting constraint obviously exists.

I will also note that what I am writing is my opinion, and does not necessarily reflect the views of the economists who developed MMT. I think that poorer countries face some difficulties with free-floating currencies, a view with which they may not agree.
Bond Economics
Why Rich Countries Should Float Their Currencies
Brian Romanchuk

5 comments:

The Rombach Report said...

Aren't rich countries already floating their currencies?

Brian Romanchuk said...

In the euro area, no.

Otherwise, the title was in reference to the "external constraint" discussion, which implied that the external constraint should somehow force countries to not float.

Matt Franko said...

This is good from Brian:

" This implies that there is a constraint on regulation - banks must be regulated in a fashion that is coherent with a free float in the currency. Many countries have failed to regulate their banks properly (e.g., foreign currency mortgages are commonplace in many countries), but their incompetence does not mean that it is impossible to run a banking system properly."

These "problems" happen NOT at the state Treasuries but rather at the Fiscal Agents of the state...

A state can always exchange currencies with that state's fiscal agents... if a fiscal agent ends up with surplus foreign currency, then it is the responsibility of the state to exchange currency with those agents, if a state is unwilling to do this, then that state should never have let their fiscal agent go abroad to do business in the first place....

Again I go back to our ancestors here in Plato's "Laws" from 360 BC :

"If a private person is ever obliged to go abroad, let him have the consent of the magistrates and go; and if when he returns he has any foreign money remaining, let him give the surplus back to the treasury, and receive a corresponding sum in the local currency."

So they knew that if they let an agent go abroad, that if that agent came back with surplus foreign currency it was their obligation to change the domestic entity out at whatever the state deemed the exchange rate.... either that or not let them go abroad in the first place...

But again this was a system they were operating that they knew was independent of the metallurgy they were using for coinage...

this knowledge eventually was removed from humans and our system today is still being run like we are under the metals so you see the states thinking they have no authority to run policy this way... as the magesterial people operating the state today think they can "run out of money!"....

So the state today is more or less blind to their responsibility to regulate the system correctly and tries to let it fall solely on the shoulders of the states agents which is impossible as the states fiscal agents have balance sheets of finite size and the forex fluctuations can easily put the agents "out of business" if they move the wrong way...

rsp,

googleheim said...

CAN YOU SAY LIBOR RIGGING?

BANKS LOWER INTEREST RATES AND CREDIT UNIONS LOSE LIKE DETROIT FIREMEN.

SURE DETROIT IS CORRUPT BUT THAT GETS BANK AMERICA OFF THE HOOK?

Seve141 said...

Great article Mr. Romanchuk.

Thanks