In the ‘currency wars’ discussion, it is almost taken for granted that exchange rate depreciations will result in non-trivial export gains. Using evidence from countries in Europe and Asia, this column argues instead that factors unrelated to prices/exchange rates often play a predominant role in shaping trade developments. Moreover, these factors affect export outcomes in a very diversified manner across countries, in part because of the interplay of global value chains.So much for that theory.
vox.ue
Fighting ‘currency wars’ with blanks: The limited role of exchange rates in export competitiveness
Filippo di Mauro, Konstantins Benkovskis, Sante De Pinto, Marco Grazioli
Fighting ‘currency wars’ with blanks: The limited role of exchange rates in export competitiveness
Filippo di Mauro, Konstantins Benkovskis, Sante De Pinto, Marco Grazioli
The exchange rates are a function of the prices of the goods not the other way around....
ReplyDeleteTom,
ReplyDeleteI thought that a propensity for trade flows to adjust to currency depreciation was an important part of MMT.
If foreigners lose their desire to accumulate a country's domestic currency assets, then trade flows have to adjust (something that the mainstream and MMT would agree on, I think). If this can't happen through an exchange rate depreciation (and I'd agree that it may well not), then you'd expect it to constrain domestic demand, wouldn't you? If you can't run a foreign deficit and you can't depreciate it away, then any attempt to reflate will just send the exchange rate into freefall.
Nick,
ReplyDeleteThey come to a hard stop at the front door of the banking system... they won't go in there... ("banksters! .. scary people!!!" or some other bias they have...) so they describe exchange rates as "free floating" when in fact they are better described as 'regulated'...
They will say things like: "trade is reduced!" ex post when in fact it has actually increased in tonnage or other units of measure... only the price has changed... so when the banking system makes regulatory adjustments in repsonse to this pricing development, they will describe that as "free floating" which imo misses the mark... the actions of the banking system are still subject to normal regulation and the banks seek to comply...
Look at this illustration of osmotic flow:
https://www.youtube.com/watch?v=eQsAzXr0UCU
The levels of solution on either side of the regulatory membrane do change in response to a sudden change in the concentration on either side, BUT the level is NOT 'free floating', it is a determinable (regulated) level that will be reached on either side of the tube...
If we didnt understand osmosis, we might describe it as 'free floating'....
Nick, I have questioned that assumption in the past as taken over from neoclassical theory uncritically. The authors of that post and study suggest it is more complicated than the broad theory based on supply and demand for currencies in the currency market.
ReplyDeleteMatt has given reasons why he thinks the assumption is simplistic, too.
I think that the currency value theory based on price and quantity is related to the similar interest rate theory of price level. Both are simplistic and the broad conclusions of both theories don't hold up empirically.
The problem seems to be assuming causality, I.e, a single cause, so that it is passable to write a function and draw line on a graph. The reality seems to be that conditions apply and different factors come into play dynamicially.