Fixed vs. flexible exchange rates

[paul davidson <pdavidson@xxxxxxx>]

At 11:51 AM 4/28/03 , Henry wrote:


> Warren Mosler wrote:
> > --- "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx> wrote:
> >
> > > Paul is absolutely correct.  Further more, the
> > > Mosler/Mitchel/Wray proposal does not deal with the froeign exchange
> > > problem.
> >
> > ???  There is not foreign exchange 'problem' apart
> > from fixed exchange rate policies, is there?
> > Also, as per your other post, why would anyone want to
> > force an exporter to spend his fx earnings???
>
> Warren, we have been through this before. Under dollar hegemony, fixed
> exchange rates require dollar reserves to hold. The Mundell-Fleming
> thesis, for which Robert Mundell won the 1999 Nobel Prize,
> states that in international finance, a government has the choice
> between (1) stable exchange rates, (2) capital mobility and (3) policy
> autonomy (full employment/low interest rates, counter-cyclical fiscal
> spending, etc). With unregulated global financial markets, a government
> can have only two of those three options.


I think those with those who think that a flexible exchange rate is the
problem and a flexible exchange rate is the solution -- suffer from a
failure to understand the lack of Marshall -Lerner conditions in modern day
international trade so that devaluation exacerbates the problem -- as those
who speak about the J-curve are implying for in the short-run the downward
slope in the J is almost inevitable and -- you will note as I demonstrate
in my book,it is assumed thatthe  upward slope of the J kicks in --in the
longer run, the Marshall-Lerner condition kicks in.

Of course it is the basis an excellent substitute for everything else --
price elasticities are very large if not infinite.

This assumption -- often implicit and therefore not specified --of high
elasticities assures that a flexible price system will clear all markets at
full employment -- at least in the long run -- when we are all dead. In the
short-run interim in which we all live, there can be many painful, and
perhaps even deadly,  income effects of flexible exchange rates.

For a further discussion see my article "Are Fixed Exchange Rates the
Problem and Flexible Exchange Rates the Solution?" in the Spring 2003 issue
of the EASTERN ECONOMIC JOURNAL.

Paul

Paul