chapter  1
11 Pages

Competitive exchange rates and macroeconomic theory

WithHeiner Flassbeck

Mainstream economic theories still suggest that financial markets, including the markets for currencies, smoothly and automatically solve the most complex and enduring economic problem, namely the transformation of today's savings into tomorrow's investment or the savings of one country into the investment of another country. It assumes that with efficient financial markets the decision of some people or countries not to spend their revenues but to put part of them aside does not create a major problem. This view faces two major objections. The first concerns the mechanism of inter-regional allocation of savings, the second the functioning of markets in general. The currency system is crucial because it is the valve that regulates the pressure in all parts of the system and prevents an increase of pressure in certain parts that would endanger the survival of the whole edifice. Major currencies could arrange a mutual network of bilateral uncovered interest rate parity (UIP) exchange rate paths.