Re: ReOrient global Keynesianism (2) - Sen

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

Gernot

I think we need to be a bit more precise about what we mean by globalization
and what causes it.  How we understand it has implications for how we deal
with it.

To me, globalization exists when the growth in traded goods and services
sector is faster than the growth in non-traded goods and services sector.

Globalization exists as a result of the floating exchange rate constraints.
Let me explain.

Under the fixed and optimising exchange rate system, an increase in exports
allowed money to flow into the economy, stimulating demand for both traded
(imports) and non-traded products.  Thus the traded and non-traded goods
sectors both grew and they tended to grow at the same rate.

Under the floating exchange rate system, international receipts and payments
must be equal.  Thus if there is an increase in exports and thereby
increased foreign receipts, the exchange rate is required to adjust to cause
a simultaneous increase in foreign payments.  This is usually achieved
through increased imports.  Thus the traded sector can grow without a
corresponding increase in the non-traded goods sector.

Under the fixed and optimising exchange rate mechanisms, the increases in
exports raise incomes, and thereby aggregate demand.  This means an increase
in expenditure on both domestic products and imports.

But under the floating exchange rate system, aggregate demand is not
increased.  There is no additional flow of funds into the economy from the
growth of exports.  Rather, the only way imports can increase is if demand
is shifted from domestic products to imports.  That means less expenditure
on non-traded goods and more on traded goods.

Thus the traded goods sector grows more rapidly than the non-traded goods
sector; that is, it leads to the phenomena we commonly call "globalisation".

Some people are likely to react to this post by saying I am advocating
returning to fixed exchange rates.

I am not.

I prefer variable market determined exchange rates.  The only part of the
floating exchange rate system that causes these less than optimal outcomes
is the requirement that international receipts and payments be equal.

Regards


Leigh