ABSTRACT
The last two chapters introduced concepts ranging from psychology to balance of payments accounting. The ultimate aim of those discussions was the illumination of the process of exchange rate determination. The following points were made:
1 There is no reason to expect exchange rates to move in a way that restores balanced trade. That exchange rates do just that is a central theme in almost every Neoclassical theory (MacDonald 1995: 482). This is an offshoot of their discounting of the role of portfolio capital and it is a leg of their argument that the economy tends toward full employment. But if uncertainty is assumed and fi nancial fl ows are allowed a signifi cant role, there is absolutely no reason to expect the actual exchange rate to be drawn to the level that would eliminate trade imbalances. Even if market participants believe that nations with trade defi cits are, for example, default risks, leading them to sell that nation’s currency and hence reduce the imbalance by causing the currency to depreciate, this is neither inevitable nor will it likely be suffi cient. Furthermore, if it does occur, it is a function of a change in expectations in the fi nancial capital market rather than of events in the market for goods and services.
