IDEAS home Printed from https://ideas.repec.org/a/kap/openec/v1y1990i3p229-250.html
   My bibliography  Save this article

Why floating exchange rates fall: A reconsideration of the liquidity trap

Author

Listed:
  • Ronald McKinnon

Abstract

In the international capital market, interest rates would seem to be natural shock absorbers for balancing currency risk associated with expected inflation or differential taxation. Under a floating exchange rate, however, short-term interest rates in each national money market behave as if caught in a liquidity trap. The problem arises because the domains for national monetary circulation remain somewhat disjoint even though the bond market is fully integrated internationally. The national rate of interest is ncapable of equilibriating the domestic money market on the one hand and the international bond market on the other. The result is excessively high exchange-rate volatility that distorts the flow of international commodity trade and causes cycles of inflation and deflation in open economies. Copyright Kluwer Academic Publishers 1990

Suggested Citation

  • Ronald McKinnon, 1990. "Why floating exchange rates fall: A reconsideration of the liquidity trap," Open Economies Review, Springer, vol. 1(3), pages 229-250, October.
    • Handle: RePEc:kap:openec:v:1:y:1990:i:3:p:229-250
    DOI: 10.1007/BF01886157
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/BF01886157
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/BF01886157?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
    2. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-381, May.
    3. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
    4. Ronald I. McKinnon, 1988. "An International Gold Standard without Gold," Cato Journal, Cato Journal, Cato Institute, vol. 8(2), pages 351-392, Fall.
    5. Aliber, Robert Z, 1973. "The Interest Rate Parity Theorem: A Reinterpretation," Journal of Political Economy, University of Chicago Press, vol. 81(6), pages 1451-1459, Nov.-Dec..
    6. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    7. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-460, November.
    8. RONALD I. McKINNON, 1990. "Interest Rate Volatility And Exchange Risk: New Rules For A Common Monetary Standard," Contemporary Economic Policy, Western Economic Association International, vol. 8(2), pages 1-17, April.
    9. Ronald McKinnon, 1990. "The exchange rate and the trade balance," Open Economies Review, Springer, vol. 1(1), pages 17-37, February.
    10. McKinnon, Ronald I, 1988. "Monetary and Exchange Rate Policies for International Financial Stability: A Proposal," Journal of Economic Perspectives, American Economic Association, vol. 2(1), pages 83-103, Winter.
    11. Omar F. Hamouda & Robin Rowley & Bernard M. Wolf (ed.), 1989. "The Future of the International Monetary System," Books, Edward Elgar Publishing, number 203.
    12. McKinnon, Ronald I., 1979. "Money in International Exchange: The Convertible Currency System," OUP Catalogue, Oxford University Press, number 9780195024098.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. de Groof, R.J. & van Tuijl, M.A., 1993. "The twin-debt problem in an interdependent world," Research Memorandum FEW 588, Tilburg University, School of Economics and Management.
    2. de Groof, R.J. & van Tuijl, M.A., 1991. "Financial integration and fiscal policy in interdependent two-sector economies with real and nominal wage rigidity," Research Memorandum FEW 526, Tilburg University, School of Economics and Management.
    3. de Groof, R.J. & van Tuijl, M.A., 1992. "Commercial integration and fiscal policy in interdependent, financially integrated two-sector economies with real and nominal wage rigidity," Other publications TiSEM 892948a8-83fa-42c0-96bf-b, Tilburg University, School of Economics and Management.
    4. de Groof, R.J. & van Tuijl, M.A., 1992. "Commercial integration and fiscal policy in interdependent, financially integrated two-sector economies with real and nominal wage rigidity," Research Memorandum FEW 567, Tilburg University, School of Economics and Management.
    5. de Groof, R.J. & van Tuijl, M.A., 1993. "The twin-debt problem in an interdependent world," Other publications TiSEM 50e0a068-20c7-4bf4-a6e3-8, Tilburg University, School of Economics and Management.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frenkel, Jacob A. & Mussa, Michael L., 1985. "Asset markets, exchange rates and the balance of payments," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 14, pages 679-747, Elsevier.
    2. Maurice Obstfeld, 1995. "Intenational Currency Experience: New Lessons and Lessons Relearned," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 119-220.
    3. Richard M. Levich, 1983. "Empirical Studies of Exchange Rates: Price Behavior, Rate Determinationand Market Efficiency," NBER Working Papers 1112, National Bureau of Economic Research, Inc.
    4. Ronald McKinnon, 1990. "The exchange rate and the trade balance," Open Economies Review, Springer, vol. 1(1), pages 17-37, February.
    5. Osler, C. L., 1998. "Short-term speculators and the puzzling behaviour of exchange rates," Journal of International Economics, Elsevier, vol. 45(1), pages 37-57, June.
    6. Lui, Yu-Hon & Mole, David, 1998. "The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 535-545, June.
    7. Obstfeld, Maurice & Stockman, Alan C., 1985. "Exchange-rate dynamics," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 18, pages 917-977, Elsevier.
    8. Dal Bianco, Marcos & Camacho, Maximo & Perez Quiros, Gabriel, 2012. "Short-run forecasting of the euro-dollar exchange rate with economic fundamentals," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 377-396.
    9. Wyplosz, Charles, 2001. "Exchange Rate Regimes: Some Lessons from Postwar Europe," CEPR Discussion Papers 2723, C.E.P.R. Discussion Papers.
    10. C. Emre Alper & Oya Pinar Ardic & Salih Fendoglu, 2009. "The Economics Of The Uncovered Interest Parity Condition For Emerging Markets," Journal of Economic Surveys, Wiley Blackwell, vol. 23(1), pages 115-138, February.
    11. Olivier Blanchard, 2000. "What Do We Know about Macroeconomics that Fisher and Wicksell Did Not?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(4), pages 1375-1409.
    12. Paul R. Bergin & Robert C. Feenstra, 2017. "Pricing-to-Market, Staggered Contracts, and Real Exchange Rate Persistence," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 6, pages 155-185, World Scientific Publishing Co. Pte. Ltd..
    13. Yin-Wong Cheung & Menzie D. Chinn & Ian W. Marsh, 2004. "How do UK-based foreign exchange dealers think their market operates?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 289-306.
    14. Shin-ichi Fukuda & Masanori Ono, 2006. "On the Determinants of Exporters' Currency Pricing: History vs. Expectations (Subsequently published in "Journal of the Japanese and International Economies", Vol.18, No.4, December 2006, pp," CARF F-Series CARF-F-080, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    15. Westerhoff, Frank H., 2003. "Expectations driven distortions in the foreign exchange market," Journal of Economic Behavior & Organization, Elsevier, vol. 51(3), pages 389-412, July.
    16. Drabek, Zdenek & Brada, Josef C., 1998. "Exchange Rate Regimes and the Stability of Trade Policy in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(4), pages 642-668, December.
    17. Estefania Mourelle & Juan Carlos Cuestas & Luis Alberiko Gil‐alana, 2011. "Is There An Asymmetric Behaviour In African Inflation? A Non‐Linear Approach," South African Journal of Economics, Economic Society of South Africa, vol. 79(1), pages 68-90, March.
    18. Edwards, Sebastian, 1983. "Floating exchange rates, expectations and new information," Journal of Monetary Economics, Elsevier, vol. 11(3), pages 321-336.
    19. Kari Heimonen, 2006. "Time-Varying Fundamentals of the Euro-Dollar Exchange Rate," International Economic Journal, Taylor & Francis Journals, vol. 20(4), pages 385-407.
    20. Michael P. Dooley & Peter Isard, 1979. "The portfolio-balance model of exchange rates," International Finance Discussion Papers 141, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:openec:v:1:y:1990:i:3:p:229-250. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.