Читать книгу Foreign Exchange: The Complete Deal - James McDowell. Sharpe - Страница 14

The proponents of a floating exchange rate will cite its flexibility and self-correcting nature. With a floating exchange rate, a balance of payments disequilibrium should be rectified by a change in the external price of the currency – a self-correcting mechanism.

For example, if a country has a current account payments deficit then the currency should depreciate. The effect of the depreciation should be to make the country’s exports cheaper and imports more expensive, thus increasing demand for goods abroad and reducing internal demand for foreign goods, therefore dealing with the balance of payments problem. Conversely, a balance of payments surplus should be eliminated by an appreciation of the currency.

However, recent experience in the UK and US indicates that a floating exchange rate does not automatically cure a balance of payments deficit, or at best the correction process is glacial. This is because the competitiveness of a country’s economy is not just about the currency. Ultimately, the trade adjustment will have to go hand in hand with an adjustment in savings and consumption in each economy.

The adjustment mechanisms associated with fixed exchange rates versus floating exchange rates tend to produce different economic costs. Under a fixed rate system, curing a deficit is likely to involve a general deflationary policy (higher taxes, cuts in expenditures) resulting in increased unemployment and lower economic growth. The floating rate system tends to be inflationary as the exchange rate depreciates following current account deficits. This has usually been the case for countries such as the UK, which is dependent on imports of food and raw materials. It has become an issue for a number of countries which are pegged to the dollar, notably in the Middle East.

A rise in interest rates as part of an anti-inflation package may encourage an inflow of funds. This will increase the price of the currency and will make the economy less internationally competitive. Floating can therefore raise concerns over discipline in economic management. The presence of an inflation target though should help overcome this. When using a fixed rate system, governments have a built-in incentive not to follow inflationary policies. If they do, then unemployment and balance of payments problems are certain to result as the economy becomes uncompetitive.

For this reason, under the Bretton Woods Agreement governments could not allow their inflation rates to differ greatly. The initial policy response was normally to deflate; under the gold standard, deflation would have occurred automatically. Unemployment would rise in both cases. As Galbraith put it, those who express a preference between inflation and depression are “making a fool’s choice – you deal with what you have”. Deflation and depression in the 1930s and inflation in the 1970s were both destructive to the world order.

Those who prefer the floating system will claim that under fixed exchange rates there is loss of freedom in internal policy. This is clearly the case for those who joined the euro in January 1999. Some commentators in the UK regularly quote this as a good reason not to enter and cite the positive effects of devaluation post-1992 and the ability to devalue after the financial shocks of 2008. However, it begs the question of whether if there had been financial discipline prior to these events then devaluation would not have been an issue. In both cases the inflationary impact was muted as fortunately global deflationary pressures dominated.

Looking at the euro in more detail provides some interesting insights.