Sunday, February 06, 2005

Robert Mundell Wouldn’t be Surprised

It would not be very surprising to Robert Mundell that the US is seeking more exchange rate flexibility in China. After all, the dominant country in the international monetary system gets all the advantages of flexible exchange rates, and none of the drawbacks. Why? Because the liabilities of the residents of the dominant currency countries will be denominated in the domestic currency. After all, there is little incentive for US residents to take on debt in, say, Brazilian Reais. As he wrote in 1969,
It is, I believe, no accident that the two leading advocates of variable exchange rates – Keynes in the 1920’s and Friedman in the 1950’s – should be residents of dominant currency countries. Keynes changes his mind on the issue in the 1930’s as he recognized, after Britain abandoned gold in 1931, that Britain could no longer hope to be top dog in the international currency competition.
*“Toward a Better International Monetary System” Journal of Money, Credit and Banking, Vol. 1 No 3 (Aug, 1969)


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