Exchange Rates and Capital Flows

  • Imre Tarafás BUTE

Abstract

Floating exchange rates were supposed to automatically restore the external balance of an economy, leaving monetary policy free to pursue domestic objectives, without the external constraint. There was also a promise that floating exchange rates would not, in fact, fluctuate much and would be rather stable thanks to speculation. Forty years of experience with floating rates do not support such claims. Floating exchange rates have proved to be volatile, have allowed large and persistent current account imbalances, have not relieved monetary policy form the external constraint and often, made it more difficult for monetary policy to achieve domestic policy objectives. What floating exchange rates made possible was the across-the-board liberalization of cross-border capital flows which, growing ever higher relative to real economy transactions, have turned the exchange rate, out of a policy instrument, into a mere by-product of the interplay of speculative forces.
Keywords: Exchange rates, Capital flows, Monetary policy
Published online
2015-03-25
How to Cite
Tarafás, I. (2015) “Exchange Rates and Capital Flows”, Periodica Polytechnica Social and Management Sciences, 23(1), pp. 1-6. https://doi.org/10.3311/PPso.7965.
Section
Articles