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Foreign Exchange Dealers, the Domestic Money Market and Stabilising Speculation

In: International Monetary Problems and Supply-Side Economics

Author

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  • Ronald I. McKinnon

Abstract

In the absence of intervention by central banks, is private speculation in the foreign exchanges likely to stabilise the exchange rate? Many writers in the 1950s and 1960s reacted negatively to Milton Friedman’s (1953) seminal suggestion that speculators, if they were not to lose money, must on average buy when the price of foreign exchange is low and sell when it is high thereby stabilising the market.1 But Harry Johnson (1976, p. 101) summarised the outcome of this debate in favour of Friedman: The critics have, however, in the judgment of those who have studied the matter, failed to make their case: their counterexamples have implicity either selected arbitrarily a small group of especially clever destabilizing speculators who make money at the expense of other destabilizing speculators (the whole group losing in total), or imputed to destabilizing speculators profits that are not realised — and could not be realized — through market closures of the speculation [see Telser, 1959]. Yet there remains uneasiness about Friedman’s result.

Suggested Citation

  • Ronald I. McKinnon, 1986. "Foreign Exchange Dealers, the Domestic Money Market and Stabilising Speculation," Palgrave Macmillan Books, in: Jon S. Cohen & G. C. Harcourt (ed.), International Monetary Problems and Supply-Side Economics, chapter 3, pages 28-55, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-1-349-18392-0_3
    DOI: 10.1007/978-1-349-18392-0_3
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    Cited by:

    1. Rob Hayward, 2018. "Foreign Exchange Speculation: An Event Study," IJFS, MDPI, vol. 6(1), pages 1-13, February.

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