The Case for Flexible Exchange Rates

Friedman, Milton

doi:10.1007/978-1-349-24443-0_16

Cited by 826 publications

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“…The impossible trinity emerged out of the work of Milton Friedman (1953) and Robert Mundell (1961a, b). That work is infused with the laissez-faire predispositions of those authors, and as such the impossible trinity frame traps policy debate by obscuring other possibilities.…”

Section: Abandoning the Impossible Trinitymentioning

confidence: 99%

Rethinking the economics of capital mobility and capital controls

Palley¹

2009

Rev. Econ. Polit.

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This paper reexamines the issue of international financial capital mobility, which is today's economic orthodoxy. Discussion is often framed in terms of the impossible trinity. That framing distorts discussion by representing capital mobility as having equal significance with sovereign monetary policy and control over exchange rates. It also distorts discussion by ignoring possibilities for coordinated monetary policy and exchange rates, and for managed capital flows. The case for capital mobility rests on neo-classical economic efficiency arguments and neo-liberal political arguments. The case against capital mobility is based on Keynesian macroeconomic inefficiency arguments, neo-Walrasian market failure arguments, and neo-Marxian arguments regarding distortion of the social structure of accumulation. Close examination shows the case for capital mobility to be extremely flimsy, pointing to the ideological dimension behind today's policy orthodoxy.

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Section: Abandoning the Impossible Trinitymentioning

confidence: 99%

Rethinking the economics of capital mobility and capital controls

Palley¹

2009

Rev. Econ. Polit.

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“…Friedman (1953) nds that shocks require the adjustment of relative price levels between countries and that because internal prices are highly in exible, the exchange rate should be exible. Feldstein (1992) argues that domestic de ation is likely to require a period of increased unemployment, so a decline in the nominal exchange rate would prove bene cial.…”

Section: Discussionmentioning

confidence: 99%

China, the Dollar Peg and U.S. Monetary Policy

Tervala

2014

SSRN Journal

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I examine the transmission of expansionary U.S. monetary policy in case where developing countries--including China--peg their currencies to the dollar. I evaluate the value of the dollar peg as a fraction of consumption that households would be willing to pay for the dollar peg to remain as well off under the dollar peg as under a flexible exchange rate. The value of the dollar peg is positive for the dollar bloc because the U.S. can no longer improve its terms of trade at the dollar bloc's expense. This provides a rationale for fixing the exchange rate. If the expenditure switching effect is weak, the peg is harmful to the U.S., providing a rationale for criticism of China's exchange rate policy.JEL Classification: E32, E52, F30, F41, F44

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“…However, overreaction of some agents will be offset by underreaction of other agents. Moreover, according to Friedman (1953), possible mispricing caused by so-called noise traders will soon vanish through the actions of rational agents. He argues that in such a way, speculators keep foreign exchange markets stable and efficient in case of a flexible exchange rate system.…”

Section: Efficient Marketsmentioning

confidence: 99%