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Exchange rate determination and the flaws of mainstream monetary theory

Author

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  • Heiner Flassbeck

Abstract

Developing countries in general need flexibility and a sufficient number of instruments to prevent excessive volatility. Evidence does not support the orthodox belief that, with free floating, international financial markets will perform that role by smoothly adjusting exchange rates to their “equilibrium” level. In reality, exchange rates under a floating regime have proved to be highly unstable, leading to long spells of misalignment. The experience with hard pegs has not been satisfactory either: the exchange rate could not be corrected in cases of external shocks or misalignment. Given this experience, “intermediate” regimes are preferable when there is instability in international financial markets. JEL Classification: E4; F.

Suggested Citation

  • Heiner Flassbeck, 2018. "Exchange rate determination and the flaws of mainstream monetary theory," Brazilian Journal of Political Economy, Center of Political Economy, vol. 38(1), pages 99-114.
    • Handle: RePEc:ekm:repojs:v:38:y:2018:i:1:p:99-114:id:56
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    File URL: https://centrodeeconomiapolitica.org.br/repojs/index.php/journal/article/view/56/52
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    More about this item

    Keywords

    Exchange rate regime; external shocks; flexible exchange rates; financial markets; hard pegs;
    All these keywords.

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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