Exchange rate determination and the flaws of mainstream monetary theory

Vol. 38 No. 1 (2018)

Jan-Mar / 2018
Published January 1, 2018
PDF-English
PDF-English

How to Cite

Flassbeck, Heiner. 2018. “Exchange Rate Determination and the Flaws of Mainstream Monetary Theory”. Brazilian Journal of Political Economy 38 (1):99-114. https://doi.org/10.1590/0101-31572018v38n01a06.

Exchange rate determination and the flaws of mainstream monetary theory

Heiner Flassbeck
Division on Globalization and Development Strategies of the United Nations Conference on Trade and Development (UNCTAD), Geneve, Switzerland.
Brazilian Journal of Political Economy, Vol. 38 No. 1 (2018), Jan-Mar / 2018, Pages 99-114

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.


Keywords: Exchange rate regime external shocks flexible exchange rates financial markets hard pegs