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Fixed and Flexible Exchange Rates and Currency Sovereignty

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  • C. Sardoni
  • L. Randall Wray

Abstract

This paper provides an analysis of Keynes's original "Bancor" proposal as well as more recent proposals for fixed exchange rates. We argue that these schemes fail to pay due attention to the importance of capital movements in today's economy, and that they implicitly adopt an unsatisfactory notion of money as a mere medium of exchange. We develop an alternative approach to money based on the notion of currency sovereignty. As currency sovereignty implies the ability of a country to implement monetary and fiscal policies independently, we argue that it is necessarily contingent on a country's adoption of floating exchange rates. As illustrations of the problems created for domestic policy by the adoption of fixed exchange rates, we briefly look at the recent Argentinean and European experiences. We take these as telling examples of the high costs of giving up sovereignty (Argentina and the European countries of the EMU) and the benefits of regaining it (Argentina). A regime of more flexible exchange rates would have likely produced a more viable and dynamic European economic system, one in which each individual country could have adopted and implemented a mix of fiscal and monetary policies more suitable to its specific economic, social, and political context. Alternatively, the euro area will have to create a fiscal authority on par with that of the U.S. Treasury, which means surrendering national authority to a central government--an unlikely possibility in today's political climate. We conclude by pointing out some of the advantages of floating exchange rates, but also stress that such a regime should not be regarded as a sort of panacea. It is a necessary condition if a country is to retain its sovereignty and the power to implement autonomous economic policies, but it is not a sufficient condition for guaranteeing that such policies actually be aimed at providing higher levels of employment and welfare.

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Bibliographic Info

Paper provided by Levy Economics Institute in its series Economics Working Paper Archive with number wp_489.

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Date of creation: Jan 2007
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Handle: RePEc:lev:wrkpap:wp_489

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  1. Basil J. Moore, 2004. "A global currency for a global economy," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 26(4), pages 631-653, October.
  2. Goodhart, Charles A. E., 1998. "The two concepts of money: implications for the analysis of optimal currency areas," European Journal of Political Economy, Elsevier, vol. 14(3), pages 407-432, August.
  3. Davidson, Paul, 1972. "Money and the Real World," Economic Journal, Royal Economic Society, vol. 82(325), pages 101-15, March.
  4. Guillermo A. Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," Journal of Economic Perspectives, American Economic Association, vol. 17(4), pages 99-118, Fall.
  5. Andrew Berg & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Esteban Jadresic & Paul R. Masson, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund.
  6. L. Randall Wray, 1998. "Modern Money," Economics Working Paper Archive wp_252, Levy Economics Institute.
  7. Forder, James, 1998. "Central Bank Independence--Conceptual Clarifications and Interim Assessment," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 307-34, July.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The spurious victory of MMT
    by Matias Vernengo in Naked Keynesianism on 2012-07-02 12:58:00
  2. Critiche all'MMT tradotte in italiano
    by Sergio Cesaratto in Politica&EconomiaBlog on 2012-07-08 07:14:00
  3. Una nuova critica a Wray e all'MMT
    by Sergio Cesaratto in Politica&EconomiaBlog on 2012-07-03 05:13:00
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Cited by:
  1. Rosaria Rita Canale, 2010. "Central Bank Reaction to Public Deficit and Sound Public Finance: The Case of the European Monetary Union," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 0(1), pages 4-17, June.
  2. Dimitri B. Papadimitriou & L. Randall Wray, 2012. "Euroland's Original Sin," Economics Policy Note Archive 12-08, Levy Economics Institute.
  3. Canale, Rosaria Rita & Napolitano, Oreste, 2009. "The recessive attitude of EMU policies: reflections on the italian experience, 1998–2008," MPRA Paper 20207, University Library of Munich, Germany.

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