Re: Fixed vs. flexible exchange rates

[Warren Mosler <mosler@xxxxxxxxxxxxxx>]

>
> I think those with those who think that a fixed
> 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.

But again, here you imply imports are a 'problem?'
And that a weaker exchange rate won't reduce imports.
But imports are a benefit, not a cost.  And exports
are the cost of imports.
>
> 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 --

I agree that is an incorrect assumption.  What I have
said is that a country with a flexible exchange rate
can maintain full employment regardless at all times,
via elr, for example, or even more mainstream demand
management.

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.

Yes, that domestic full employment policy can turn to
the advantage of the domestic standard of living.
These 'deadly' income effects are generally due to
imports 'costing jobs' and income.  But with a
floating exchange rate the domestic govt. can simply
hire the unemployed to make sure their income is
continued or manage additional net spending to make
sure there is sufficient agg demand to keep domestic
income high enough.

Warren


>
> 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
>
>


=====
Warren Mosler, www.mosler.org
c/o James River Capital Corp
5007 Chandler's Wharf, Suite 201/202
Christiansted, USVI  00820
340-719-8813 office phone
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Primary email contact:  mosler@xxxxxxxxxxxxxx

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