Fixed and Flexible Exchange Rates and Currency Sovereignty

The Levy Economics Institute's Working Paper Series

23 Pages Posted: 6 Feb 2007

See all articles by L. Randall Wray

L. Randall Wray

University of Missouri at Kansas City; Bard College - The Levy Economics Institute

Claudio Sardoni

University of Rome "La Sapienza"

Date Written: January 2007

Abstract

This paper provides an analysis of Keynes's original "Bancor" proposal as well as more recent proposals for fixed exchange rates. We argue that these schemes fail to pay due attention to the importance of capital movements in today's economy, and that they implicitly adopt an unsatisfactory notion of money as a mere medium of exchange. We develop an alternative approach to money based on the notion of currency sovereignty. As currency sovereignty implies the ability of a country to implement monetary and fiscal policies independently, we argue that it is necessarily contingent on a country's adoption of floating exchange rates. As illustrations of the problems created for domestic policy by the adoption of fixed exchange rates, we briefly look at the recent Argentinean and European experiences. We take these as telling examples of the high costs of giving up sovereignty (Argentina and the European countries of the EMU) and the benefits of regaining it (Argentina). A regime of more flexible exchange rates would have likely produced a more viable and dynamic European economic system, one in which each individual country could have adopted and implemented a mix of fiscal and monetary policies more suitable to its specific economic, social, and political context. Alternatively, the euro area will have to create a fiscal authority on par with that of the U.S. Treasury, which means surrendering national authority to a central government—an unlikely possibility in today's political climate. We conclude by pointing out some of the advantages of floating exchange rates, but also stress that such a regime should not be regarded as a sort of panacea. It is a necessary condition if a country is to retain its sovereignty and the power to implement autonomous economic policies, but it is not a sufficient condition for guaranteeing that such policies actually be aimed at providing higher levels of employment and welfare.

Keywords: Foreign Exchange, International Monetary Arrangements, Economic Integration, Stabilization, Keynes

JEL Classification: E12, E63, F31, F33, F36

Suggested Citation

Wray, L. Randall and Sardoni, Claudio, Fixed and Flexible Exchange Rates and Currency Sovereignty (January 2007). The Levy Economics Institute's Working Paper Series, Available at SSRN: https://ssrn.com/abstract=960726 or http://dx.doi.org/10.2139/ssrn.960726

L. Randall Wray (Contact Author)

University of Missouri at Kansas City ( email )

5100 Rockhill Road
Kansas City, MO 64110-2499
United States

Bard College - The Levy Economics Institute

Blithewood
Annandale-on-Hudson, NY 12504-5000
United States

Claudio Sardoni

University of Rome "La Sapienza" ( email )

Piazzale Aldo Moro 5
Roma, Rome 00185
Italy

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