As I don't wish to get caught up in arguments about whether governments do or don't create money when they spend, I am preserving the fiction of central bank and government separation. This means that the language in this post is that of monetarism, rather than MMT. I do not apologise for this: it is my firm belief that MMT and market monetarism are brothers under the skin, and the differences between them are largely semantic. Though there might be a difference in political ideology too.Coppola Comment
Understanding balance of payments crises in a fiat currency system
Frances Coppola
49 comments:
"Clearly, a country whose currency is not widely accepted externally must trade in foreign currencies"
I do grow tired of these 'Lord Kelvin' pronouncements.
The mistake - as usual - is missing the end to end transaction detail, the matching transaction in the opposite direction and using a hard dividing line on a country border for a currency. All are viewpoint analysis mistakes - just like looking at government debt as borrowing, or believing in loanable funds.
People buy goods in the currency they want to buy goods in and the people sell goods in the currency they want to receive. Ultimately that must happen end to end or there is no deal.
A powerful foreign country will try and get people to borrow and spend in their foreign currency because that locks people in. A well managed client country would allow easy bankruptcy to eliminate foreign debt (which thereby deletes foreign money) and would avoid sovereign debt in a foreign currency like the plague because there is no bankruptcy rules for sovereigns.
If nobody outside the borders wants the sovereign currency, then border trade will effectively be at barter exchange. Our dates for your medicines.
Inside the borders if no one wants the sovereign currency, then the sovereign power has limited capacity to do anything. Sovereign currencies are only powerful to the extent that taxes can be collected in them to induce sufficient demand. That requires effective force and compliance to make it work. But there doesn't need to be savings in the currency, just flow.
Once you switch the view to include those holding the sovereign currency or those who are required to find it to pay liabilities imposed on them, then the process of 'dollarisation' and the lack of holding outside a countries borders fold into precisely the same process.
It's like a star. The forces of the rest of the world are trying to push their currencies and systems onto a nation trying to collapse it inwards, and the sovereign power of the nation is forcing outwards to prevent that. Some countries can force beyond their borders and have international holdings. Some countries cannot - but can develop that over time with the correct policy regime.
No country is entitled to more stuff than it exports, and no country is entitled to have its currency accepted within the country. It has to put policies in place to make that so. Over time taxation and good management reduce the risk and export led foreign countries then turn up wanting a piece of the action - since there is nowhere else to export more to. Those suggesting they won't probably need to go on a sales course.
In a well managed fiat system currency crises won't happen or will be controlled. If there are people out there preaching doom and presenting fixed exchange as a salvation, then let them stand aside for those that *can* put in place policies and regulations that will manage the float effectively whatever is thrown at it. Policies and regulation that are relatively obvious once you see a currency area has dynamic borders, not fixed ones.
It's a matter of trade offs, clever politics and good management of the system. All of which derive from understanding how a currency works and how its dynamic border area functions. It'll take a bit of tuning, but you can be pretty certain that the currently employed policies and regulations are incorrect - derived as they are from fixed exchange rate thinking.
The problem is just like flying an aircraft as though driving a car. And then blaming the crashes on the aircraft rather than the pilot's lack of skill and understanding.
At least we now know how Brunel felt when he proposed building ships of iron.
Or this one:
"In a fiat currency system with floating exchange rates, the quantity of money in circulation is determined by the central bank**. The country is not reliant on FX or gold inflows for domestic money growth, and FX or gold outflows do not threaten the country's solvency. All the central bank needs to do is create (or destroy) the amount of money needed to maintain a target inflation level and allow the external value of the currency to adjust. The external balance is not directly linked to growth or inflation, and trade deficits do not cause crises."
To which I replied over there:
"NO!!!!!!!!!!!!!!!!! The CB does not determine the amount of money. It only determines the amount of Currency=reserves=base money, and even that it only partly determines as its just supplying an amount that corresponds to an interest rate target.
"The country is not reliant on FX or gold inflows for domestic money growth, and FX or gold outflows do not threaten the country's solvency. All the central bank needs to do is create (or destroy) the amount of money needed to maintain a target inflation level and allow the external value of the currency to adjust."
There is no reason to think that changes in CB balance sheets do anything of the sort. QE has demonstrated this over and over and over again, the composition of the CB's balance sheet is almost irrelevant (the mixture of reserves and TSY Cds), its the size of the CB's balance sheet that matters (fiscal policy changes the NUMBER of financial assets the Economy has, monetary policy only changes the TYPE of financial assets)
"The external balance is not directly linked to growth or inflation, and trade deficits do not cause crises."
This totally depends on the context. A trade deficit that is not offset with either increased private debt expansion, increased domestic velocity (increased spending out of existing income via redistribution to groups with higher propensities to consume) or a larger Govt deficit leads to a decrease in domestic employment and income."
TO which she replied:
"Auburn,
I am not discussing the relationship of the CB and the government. Nor am I discussing the relationship of the CB and commercial banks. In fact I am not discussing the creation of money at all. Who creates it is not important.
Nor am I discussing QE. What tools the CB uses are not relevant to this post. The mechanism by which money is created is not important, and nor is whether CBs do or don't directly influence the amount of money in circulation. I have covered these more than adequately in other posts. I don't need to explain it again here and it detracts from the point of the post. All we need to know is that money is created and destroyed.
You are missing the wood for the trees."
To which I replied:
"Yes Frances, I know you are one of the good guys (meaning in paradigm), and I was\am not trying to be a dick or overly critical. But there is absolutely no reason to write that line about the CB. The CB does not control the supply of money full stop. There is no amount of rationalizing or generalizing that can make that sentence into anything resembling reality.
And if the CB cant control the money supply, there's no reason to think they can manage the economy effectively via balance sheet composition changes (QE) or interest rate tinkering. Which is the other part of the quote I commented on."
To which she replied:
"With respect, Auburn, MMT adherents like yourself are not the only people who read my work. I've chosen in this post to use a monetarist framing, and I explained why in the footnote. You may not like it, but it is accurate enough for my purposes here. I don't want this post to host yet another MMT versus market monetarist dispute about the power (or lack of power) of the CB and the government. It is not remotely the point of the post. Please respect this.
I will now extend the footnote to make it clear that discussions about who exactly creates money in the economy are off topic on this post."
And finally I responded for the last time:
"CBs do not control the money supply. This is not a rhetorical distinction. There is no money multiplier and as such, CBs cannot control the money supply. This is a fact and not an opinion.
Money supply =\= currency"
In Confessions of an Economic Hitman, John Perkins explains how the game actually works in terms of bop, foreign debt, and international institutions controlled by the West.
See http://www.luc.edu/faculty/dschwei/perkinshertz.pdfDebt and Deception: Review Essay on John Perkins, Confessions of an Economic Hit Man (San Francisco: Berrett-Koehler, 2004) and Noreena Hertz, The Debt Threat: How Debt is Destroying the Developed World . . . and Threatening Us All(New York: HarperCollins 2004) for Business Ethics Quarterly
BTW the parallels in the international story and the US domestic story with to the housing crisis are strikingly similar. Basically, the same con run in different settings.
"Load 'em up with debt and extract blood."
WTF!!!!!!!!!
As if the comment that CBs control the money supply is one of point of view.
.....Well some people say that CBs control the money supply.....and some people say CBs dont control the money supply......who knows???????
After all these years, its shit like this that really depresses me. Its incontrovertible that CBs dont control the money supply, they cant do anything like that. There isnt even a good or even widely shared specific idea of what is this so-called "money supply" and if you cant even define the damn thing then how the fuck can CBs control it? Let me guess its the same way that CBs control inflation. Another fucking subject that nobody really understands. The Scott Sumners of the world deserve no respect intellectually, they are nothing but ignorant propagandists. There is no reason at all for her to take this "objective" view, which is just like our corporate media.
One side says increasing Govt spending increases growth
One side says decreasing Govt spending increases growth
but we'll have to leave it their folks, back to you Wolf Blitzer.
NOOOOOOOOO!!!!!!! There is no scenario where Govt spending increases reduce GDP. There are no negative fiscal multipliers. Its a fact, not an opinion.
I did not have the time to read this yet. But the back story is that she and Neil Wilson disagreed about something, and this is her response (without referencing what he wrote, of course).
Sigh. Can't we all get along?
" But the back story is that she and Neil Wilson disagreed about something,"
She may have disagreed with something I've wrote. I have no idea about that. Never had any correspondence from her or questions or anything. Which is fine. I'd rather talk to you Brian.
I disagree with what she says. But then that's because it is designed to fit a fixed exchange rate/basic income belief structure. So the blinkers are on.
There is actually no trade deficit or no trade surplus. There are just people holding various denominations of financial assets and liabilities.
So it's about looking at it from a slightly different viewpoint - as we have the group accounts of the central bank and Treasury - to see if anything interesting is hiding there. And I think there is.
But it is pointless trying to describe it effectively in mere words. Since it's a non-linear dynamic feedback situation you need something far more sophisticated than that.
Sigh. Can't we all get along?
No we can't because this kerfuffle is basically ideological and policy-related. It's about who controls power in a society and there also privilege and wealth.
It boils out to who controls the narrative and those whom the narrative blesses and those whom it condemns.
Ha! ok 'Rodney King' Brian! ;)
"The mechanism by which money is created is not important"
Actually it sort of is. Trade surplus countries are only trade surplus countries because the banking system will discount foreign denominated assets. Without that the system runs out of the right sorts of money to allow transactions to complete.
So when you sell your US-dollars for Canadian Dollars at a Canadian bank it's very likely that all that happens is the bank takes the US-dollars and creates the Canadian dollars by marking up your account. The bank's balance sheet then expands.
That is the 'open' position of legend.
If it is a multi-national bank then it is likely to net these off across the group - by contacting the US arm of the bank and doing the necessary swaps to get the reserves in the right place.
The question is whether this sort of 'money creation' by discounting foreign denominated financial assets is detrimental to FX stability.
Tom,
Read Auburn's comments again... there is a manifest problem with her cognition in these matters, as with 99.999% of the others....
Here is Bill from today:
"Macroeconomics students around the world rote learn the mantra that the money multiplier times the monetary base determines the money supply."
She has been trained via ROTE methods...
Auburn has NOT been ROTE trained he is an autodidact with well above average cognitive ability for systemic understanding...
She is trying to challenge her rote knowledge but it is not easy and she is in fact demonstrating how difficult this can be....
For her and everybody else like her....
Though there might be a difference in political ideology too.
Like SWL she is a British technocrat.
She doesn't understand because she does not want to understand. It undercuts her social, political and economic POV.
From what I can see, most arguments in economics have little to do with economics alone.
"She doesn't understand because she does not want to understand."
Indeed.
Frances says
"Hah true, talking about money "leaving" the country is sloppy. It doesn't, its ownership changes. Actually that is also true of gold outflows under a gold standard. Nobody physically ships gold around. They leave it in the vault and change the label."
Auburn is right. Coppola is wrong. Coppola should read Frank N. Newman’s Freedom from Federal Debt (April 2013) Newman was Deputy Secretary of the Treasury and describes US Treasury actions before the Central Bank (CB) even gets their mitts on spending Congress has authorized. The CB has nothing to do with the money supply. It plays with the hand dealt it; hence, monetary policy.
Random, Coppola is right about that. In the international gold standard days, gold simply moved from one country’s cage in the basement of the Federal Reserve to another country’s cage. Once gold became a commodity, after 1971, some countries elected to repatriate their physical holdings. EU countries in particular like to hold gold because it doesn’t count against their expenditure limit under EU rules.
So USD can leave the US banking system. By law.
France + gunboats
"Hah true, talking about money "leaving" the country is sloppy. It doesn't, its ownership changes. Actually that is also true of gold outflows under a gold standard. Nobody physically ships gold around. They leave it in the vault and change the label."
"Hah true, talking about money "leaving" the country is sloppy. It doesn't, its ownership changes. Actually that is also true of gold outflows under a gold standard. Nobody physically ships gold around. They leave it in the vault and change the label."
Partially but not completely true.
1. Currency remains in its own currency zone. But the boundaries of a currency zone are not necessarily contiguous with the borders of the issuing country.
2. Under Bretton Woods, gold bullion used for settling international accounts was moved from vault to vault based on the daily manifest at the Federal Reserve Bank of New York. But Bretton Woods failed after some countries initially led by Gaullist France demanded gold repatriation. That led to Nixon's ending USD convertibility and the closing of the gold window. Nixon Shock
So who is being "sloppy."
" the boundaries of a currency zone are not necessarily contiguous with the borders of the issuing country."
I think Trump is going to have a BBBIIIIIIIIIGGGGGG problem with this part....
An entire article on balance of payments issues without mentioning "balance sheets" or "financial assets".
The value of equity markets is more than 100% of GDP in most of the developed markets, and the people managing those equities trade at an insanely fast rate. Their trading dwarfs that of the real economy.
Yeah, things are tough for poor countries. That's a real constraint they face. This is not a constraint that matters for the developed countries.
It is abundantly clear that the commenters here have read NONE of my previous work. Indeed many of you have not even read THIS post properly. Consequently you have made remarks that are wrong and at times silly.
Neil Wilson:
"I disagree with what she says. But then that's because it is designed to fit a fixed exchange rate/basic income belief structure. So the blinkers are on."
Right at the beginning of the post I said this:
"It's weird. Whenever I say that floating exchange rates can't absorb all shocks and that balance of payments crises can happen even in fiat currency systems, I am accused of gold standard thinking. Gold standard? Me? Perish the thought. I am the world's biggest fan of fiat currencies. And of floating exchange rates, too. But that doesn't mean I regard them as a panacea."
Please explain where in this I advocated a fixed exchange rate system? Indeed please show me where in this post, or indeed in ANY of my hundreds of posts on numerous platforms, I advocate a fixed exchange rate system?
And wtf has basic income got to do with a fixed exchange rate system?
You disagree with what I say because you ignore reality. We do not have a "well managed fiat currency system". There is no international management of the global fiat currency system. There are lots of countries all doing their own thing. We have some countries operating floating-rate systems and others operating a variety of fixed and quasi-fixed exchange rate systems. We have power asymmetries, information opacity and a financial system that acts in the interests of the big powers at the expense of smaller ones. The financial system DOES NOT create a level playing field between currencies. The currency hierarchy exists. That was the point I was making.
You describe the power asymmetries and currency hierarchy yourself in your first comment here. But then you cop out by saying what amounts to "if I were you I wouldn't start from here". We'd all like to wave a magic wand and transform the world, but simply describing a different system from the one we actually have doesn't make it reality.
Auburn Parks:
I explained to you why I was using the monetarist framing. This piece was as much aimed at market monetarists as MMT folk - in fact probably more so. By all means sound off here, since I said I don't want this debated on my own post. But don't misrepresent my position. And please respect the fact that others who read my work do not agree with MMT, and at times I need to meet them where they are, even if that sets your back up. I know from experience that they will not listen to me if I talk endogenous money to them: I will simply end up with a silly argument about base money and the money multiplier, which is not the point of the post.
FYI, I used the QTM in this post because it is market monetarist gospel: but in this Pieria post, I took it apart.
http://www.pieria.co.uk/articles/getting_things_wrong_federal_reserve_style
I've also used IS/LM, the money multiplier and other economic myths to make specific points. I know their flaws, but at times they are useful. So it was this time.
(continued from previous)
Matt Franko:
""Macroeconomics students around the world rote learn the mantra that the money multiplier times the monetary base determines the money supply."
She has been trained via ROTE methods..."
I was taught the money multiplier, yes. But as a banking practitioner, I already knew it was wrong. I have been writing for YEARS about endogenous money. Here, for example:
http://www.coppolacomment.com/2013/12/malinvestment-and-endogeneity-of-money.html
http://www.forbes.com/sites/francescoppola/2014/01/21/banks-dont-lend-out-reserves/#736009383594
http://www.pieria.co.uk/articles/the_money_multiplier_is_dead
http://www.pieria.co.uk/articles/reserve_abundance_and_inflation_a_response_to_andrew_lilico
These are merely a small selection of my work over the last five years.
Even the Bank of England knows more about my work than you do. They called me in to comment on their endogenous money paper. Do some basic research before making wild allegations, please.
Tom Hickey:
Thank you for posting my piece here. You pointed out the disclaimer in the footnote, but it was then completely ignored by everyone else. What a pity.
"Like SWL she is a British technocrat."
British yes, technocrat no. I'm a banking practitioner. I write about how banks work, and I do so from a position of real practical knowledge. I do have some training in economics, but I look at things from a financial perspective rather than a macroeconomic one - which some macroeconomists find disconcerting.
"She doesn't understand because she does not want to understand. It undercuts her social, political and economic POV"
As you don't know what my social, political and economic POV is, your assertion is baseless.
I mentioned the Nixon shock in the post. And yes, France tried to repatriate its gold. But that was because the Bretton Woods system had failed. While it was still operational, no-one actually shipped gold.
MRW:
At the risk of repeating myself YET again, the monetarist framing was deliberately chosen for a particular audience. I am well aware of its flaws.
Brian:
Clearly, we can't all get along. But that is not my doing. It is due to behavior such as is displayed here, where people read an unrepresentative part of someone's extensive output, misunderstand it despite a clear explanation, then throw wild accusations around about that person's education, intelligence and beliefs.
Let's all be a bit more respectful, please.
Brian:
"An entire article on balance of payments issues without mentioning "balance sheets" or "financial assets"".
This is not true. You have not read my post properly. I suggest you go back and read it more carefully, paying particular attention to the last few paragraphs, which are all about balance sheets. I do not use the term "financial assets", but as those paragraphs are about the role of balance sheet currency mismatches in balance of payments crises, clearly that is what I am discussing.
"Yeah, things are tough for poor countries. That's a real constraint they face. This is not a constraint that matters for the developed countries."
Finally, light dawns. That is THE POINT OF MY POST. Congratulations.
"Finally, light dawns. That is THE POINT OF MY POST. "
It's the point of all of our posts - smaller countries have real constraints. The question is how best to operate state currency power within those real constraints to best effect and to get those real constraints to loosen over time.
MAJOR TYPO ON MY PART:
"So USD can leave the US banking system. By law.”
should read
NO USD can leave the US banking system. By law.
Ms Coppola,
I just came upon your responses during the course of shutting down my open tabs for the night. I’ve skimmed them, not read them. I need to get to sleep.
What’s wrong with getting the transactions correct, and therefore, the definitions of what the various institutions responsible for them correct as well?
I don’t understand perpetuating a myth in the service of dispelling another.
Frances Coppola is a self-obsessed snob. Period. I have had run-ins with her in the past and her attitude is, "It's my way or the highway." Snob.
Frances-
It doesnt matter what context you are using that framework, it doesnt matter what point you are trying to make, you wrote:
CBs determine the money supply
This is simply false, CBs do not and cannot control the money supply. Furthermore, You never even included an appropriate disclaimer....something like:
"Im only saying CBs control the money supply for the sake of argument, in reality they do not and cannot determine the money supply."
Instead you made the argument that you wrote that because you didnt want to argue about who is right on the matter, Market monetarists or MMTers. But this isnt a matter of opinion, this isnt some MMT thing. This isnt some theory, its a fact.
Good, then what are you complaining about?
Because I have written extensively about them previously: because the audience I was aiming at does not believe them: because it was not actually that important to the post.
Mr Norman, those who resort to ad hominem attacks and personal insults have lost the argument.
To quote Pontius Pilate: "What I have written, I have written".
If there were market monetarists on here, they would dispute your assertion that "CBs do not and cannot control the money supply". The problem, of course, is the definition of "money supply". A simple disclaimer such as you suggest begs the question.
Sigh.
Frances, you only pivoted to "poor countries" at the end no of your article. In the rest of it, you made generalizations about "floating currency" systems. That would imply that your analysis is applicable to a country like Canada or Japan, when actually, it really is not. Poor countries face real problems that the developed countries can largely ignore; trying to analyse them in the same framework makes limited sense.
In any event, the countries facing problems are often not truly floating. The central banks intervened heavily into the currency markets, which created a false sense of safety in foreign currency borrowing. Describing such a policy as a "floating currency" is just a rhetorical trick; if the currencies were truly floating, they would have had no currency reserves in the first place.
Brian,
The whole point of my article is the hierarchy of currencies, which is a function of wealth and power disparities between countries. It follows on from a previous post, "Rethinking government debt", which is linked at the bottom under "related reading". I'd suggest you read it, since it defines the hierarchy in more detail than I went into in this post.
Your distinction between "poor countries" and "developed countries" is too simple. Not all developed countries have the freedom of Canada or Japan. And even the term "developed country" is a value judgment. Greece, for example, is no longer classed as an "advanced economy" on the MSCI index. It is now an "emerging market economy". That is a direct consequence of the debt crisis and the appalling austerity enforced over the last seven years. It has wrecked the living standards of ordinary Greeks.
Your second paragraph makes essentially the same point as this from my post:
"However, this is not what we have. True, we have fiat currencies and inflation-targeting central banks. But we don't have universal floating exchange rates. The ghost of the gold standard still haunts the world monetary system, living on in the proliferation of currency boards, crawling pegs and other, more subtle versions of currency fixing."
It really is a bit rich to dismiss fixed or managed exchange rates as being due to the problems of "poor countries". The majority of the world is using fixed or managed exchange rates. Including, now, Japan and the Eurozone, both of which are actively pushing down the value of their currencies.
Not only a matter of having a floating rates. Sovereignty also requires not borrowing in a currency that one doesn't issue. The way the global game is set up, poor countries are encouraged to borrow beyond their means with inadequate supervision. The result is neo-colonization under international institutions.
Your distinction between "poor countries" and "developed countries" is too simple. Not all developed countries have the freedom of Canada or Japan. And even the term "developed country" is a value judgment. Greece, for example, is no longer classed as an "advanced economy" on the MSCI index.
Greece gave up currency sovereignty in joining the EZ. The countries of the EZ are currency users rather than currency issuers.
These countries are more like US states than like currency sovereigns.
Paul Krugman did not get this until the MMT folks (and Jamie Galbraith) explained it to him. He subsequently admitted his mistake and adopted that explanation, but without attribution.
If there were market monetarists on here, they would dispute your assertion that "CBs do not and cannot control the money supply".
Deliberately feeding delusions of the mentally ill is typically considered malpractice. Just because little Johnny decides he's a tortoise born in the wrong species doesn't mean you humor him.
If there were market monetarists on here, they would dispute your assertion that "CBs do not and cannot control the money supply".
Deliberately feeding delusions of the mentally ill is typically considered malpractice. Just because little Johnny decides he's a tortoise born in the wrong species doesn't mean you humor him.
We have central bankers making videos to explain they don't control the money supply while Coppola assures people in denial they don't have to listen. Monetarists behave like the hurt child told by Santa Claus he's lost his ability to deliver gifts in a single night, tearily beating his chest and shouting, "Yes you CAN! I BELIEVE in you!!"
In comes Frances, bright-eyed at the thought of becoming The Great Economic Mediator, encouraging them to stomp their feet and hold their breath. Good for her self-image and harmful to people in need of intervention rather than more ego-fluffing bullshit.
they never do, this was SWL response when I mentioned it to him:
"I got the importance of this from Paul De Grauwe. I do not know where Paul got it from. And mainstream economists are not charlatans."
Well it seems they don't understand the interest rates on government bonds with a floating exchange rate. They admit that government can just print and never become insolvent but they don't seem to get that government doesn't need to "print" not to become insolvent. This has always been the case, even Murphy was trying to say to Mosler that with current set up your theory doesn't work, you need to make changes to the system. He meant that you need to allow government overdrafts. They don't get the point that under current set up the monetary system is "treasury based" already.
my last comment was responding to Tom's comment "Paul Krugman did not get this until the MMT folks (and Jamie Galbraith) explained it to him. He subsequently admitted his mistake and adopted that explanation, but without attribution."
Frances,
I missed the "few other countries"; I only originally noticed the "reserve currency" disclaimer. But I would hardly characterize the countries involved as a "few". I would not attempt to count them, but I think it probably covers the whole OECD.
My point about asset prices is that equity flows are the major determinant of the value of many currencies. Equity trading flows dwarf trade flows, and those equity flows will tend to stabilize currency values (eventually). Obviously this does not matter for countries without developed financial sectors, but it matters a lot for "rich" countries (for example, countries with a well developed pension system). I chose the word "rich" intentionally; having large foreign equity holdings is a major stabilizing force for a currency.
I do not think any BoJ intervention is not going to induce any Japanese firm to borrow in foreign currency. The Japanese private sector has massive foreign currency financial asset holdings, which made the "yen going to 300" call very silly. This is very different from the developing countries that are intervening.
She's not worth responding to; not when she explicitly admits to doling out false information so people will like her.
Brian,
I used bond spreads as an indicator, following the BIS's work on premier safe assets. This severely restricts the number of countries. It certainly isn't the whole OECD. For a start, if effectively excludes the whole of the Eurozone except Germany and possibly France. It also excludes EU countries with pegs to the Euro, such as Denmark. That doesn't leave many "advanced economies". It really is a very small group.
I agree with you that capital flows (particularly, but not exclusively equity) are a much bigger determinant of currency value than trade flows. In my view insufficient attention is generally given to the role of capital flows, so when something like a "sudden stop" happens it catches everyone by surprise. But such sudden massive capital flows cause widespread and long-lasting economic devastation.
I would be the first to agree that Japan is very different. Indeed that was my point. Heavily managed exchange rates and active devaluation policies are not confined to poor countries.
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