The Cowboy Economist
Prof John Harvey aka The Cowboy Economist on:
Exchange Rate Theory: Is it as Horrifically Boring as it Sounds?
A Zoom webinar: Sunday 16 August 2020 – 11.00am (AEST)
Horrifically boring? Of course not! Exchange rates are exotic and the rise and fall of currencies can be swift, dramatic, and even catastrophic. Because the market is so volatile, those who trade foreign currency view themselves as a special breed, set apart from their colleagues dealing in such pedestrian areas as stocks and bonds. It is the largest market on the planet and it never closes.
Given all this, one might expect the economics discipline to have a firm grasp of the ins and outs of foreign exchange markets. In fact quite the opposite is true. Empirical studies have struggled for decades to explain currency price movements and despite experiencing an existential crisis in the early 1990s very little has changed. In short, mainstream economics relies on the assumption that a small minority of transactions–those associated with trade in goods and services–are the driving factor, when in fact it is financial capital flows that are responsible for the long trends and sudden swings we witness. This confusion on the part of orthodox economists has had a number of serious consequences including the design and implementation of policies that encourage financial speculation, retard economic development and break down the spirit of international cooperation. John Maynard Keynes anticipated all this and tried to build protections against these eventualities into the agreements that emerged from the 1944 Bretton Woods Conference, but to no avail.
Prof John Harvey will explain both the flawed perspective and what a more realistic one looks like. The basic concepts are actually quite simple and intuitive. His model helps us understand international financial crises, the pattern of trade flows, and why developing nations continue to struggle to catch up. Were this the approach that dominated economic discourse, ours would be a more civilised world.