Tuesday, April 2, 2019

Biagio Bossone — Which exchange rate regime?

Speaking about exchange rates.

Which exchange rate regime?
Biagio Bossone


André said...

"(...) the effectiveness of the exchange rate as an adjustment mechanism in a given country depends critically on three key variables (Bossone, 2018): (...) size of its public debt (irrespective of currency denomination)"

Well, that is a red flag: the author explicit does not separate between local and foreign currency debts.

Another red flag: this conclusion doesn't seem to be based on data (real world evidence), although that may be unfair as I couldn't find the author's main article and based my conclusions on the ones I found ("Fiscal Money to End the Unending Crisis" and "Free fiscal money: Exiting austerity without breaking up the Euro", by Bossone et al).

The author seems to defend the mainstream claim that the risk of local or foreign debt is the same, as either there is a risk of default (in the case of foreign debt) or of "monetisation" (in the case of local debt) - the "monetisation" would bring inflation and loss of value in real terms that would be comparable to the default. (Those are the authors own words: "yet they are exposed to the risk of future currency depreciation and the real value loss of their asset due to the authorities’ commitment to unbounded debt monetization"). For me this is nonsense. The real world doesn't work like this...

Detroit Dan said...

Well said, Andre.