Sunday, July 12, 2015
Nick Edmonds — Value of State Currency When it's not Medium of Exchange
Interesting speculation by Nick riffing off MMT.
I think that what he may be overlooking is relative saving desire in competing currencies. In Greece under a drachma regime, this would be chiefly between the new drachma (or a G-euro) and the euro.
The preference is determined by interest rate differential. It is really a foreign exchange market and that's how forex works, assuming that difference in interest rates adequately compensate for differences in risk.
The Greek government could increase saving desire in drachma by a policy rate and yield curve that draws saving into drachma instead of a competitor currency like the euro.
Reflections on Monetary Economics
Value of State Currency When it's not Medium of Exchange
Nick Edmonds
Subscribe to:
Post Comments (Atom)
4 comments:
"The preference is determined by interest rate differential. "
Not really. Forex is way more complex than that.
Agreed that the factors make forex too complicated to predict based on model assumptions. And savings preferences are not a function of interest rates either. But that doesn't mean that interest rates are not a significant factor in the mix.
Certainly interest rates are an important tool that the "owner" of a currency has in trying to maintain its value. However, my scenario helps highlight a potential problem with this.
The issue is that you are rewarding people for holding drachma by giving them more drachma.
If the state offers to pay higher interest on the currency and covers that by printing yet more currency, all it is doing is increasing the supply and deflating the the price. In order to have any effect (at least according to the theory), it needs to cover higher interest expense with higher taxes, not new money. But, of course, if it's prepared to raise taxes - increasing demand for the currency - it may not need to raise interest rates anyway.
All this applies to a limited extent to any currency, but it's more acute in my imagined scenario where the currency is no more than traded tax tokens.
What you want is ZIRP to make it easier for businesses to get loans. If speculators decide to sell, good for them, people who are interested in *real* resources and investing in your country will come.
Post a Comment