Why do currencies such as the Euro, Yen and Dollar move so greatly in relative value?
The article claims that the fact that they do move +-35% in a period of a few years is inefficient but only hits at the possible cause: 'Under fixed rates, the central bank of a small nation devotes monetary policy to targeting the exchange rate with a larger neighbor; this is a policy. But a "float" simply takes away the anchor; for a policy you need another target--historically the price of gold, more recently some measure of the domestic inflation rate.' The policy target of the domestic consumer price level is flawed. The prices of consumer goods are just that: goods consisting of both tradables and non-tradables, and assume that consumers spend their entire lives in a single geographic location and market, and hence are stuck with non-tradables prices. The reality is of course that non-tradables are partly local factor prices (land rent, and wages) and production conditions (institutions, technologies) and partly goods whose values are found on international markets. The policy target should be changed to tradable goods. This would lead to similar targeting by multiple central banks and therefore more stable exchange rates. But what does determine the value of a currency? I am not sure really the answer to this, but it can be no more than the asset backing of the currency issuer. From this point it can be seen that central banks ought to hold assets that reflect the stability they desire from their own currencies. I.e. central banks should hold assets denominated in currencies that give weighted exposure to currencies used to price sources of tradable goods. For example if the US economy, and economies with fixed exchange rates to the USD produce 35% of global output, Euro 30% and Yen 25%, then all three central banks ought to have assets denominated in similar proportions to these weightings. An alternative is for central banks to hold a common reserve asset denomination such as gold. This would, of course lead to both stability in currency value in terms of both gold and other currencies. Implimentation of monetary policy can be changed from interest rates to exchange rates as follows: Each central bank determines the value of its own currency. When the market value of its currency falls below this amount, the central bank steps in and buys its own currency back at a discount to its value and makes a profit, improving its balance sheet and asset backing per unit of currency. When a currency trades at above its assessed value the central bank sells its currency for a premium and enhances its asset backing per unit of currency. A central bank that therefore accurately assesses the value of its currency and trades accordingly will therefore be profitable, while irrational central banks will wither. The interest rate differential between two currencies is the expected depreciation of one with respect to the other and becomes the benchmark for currency reputation. An alternative is for private gold currencies to arise as a significant private substitute money, and this will lead to central banks being priced against gold on a defacto basis, both for exchange rate and interest rate. Central banks respond by holding gold denominated assets and stabilising their exchange rates with respect to gold. This leads to interest rate convergence and ultimately to the global gold standard. David Hillary ----- Original Message ----- From: <[EMAIL PROTECTED]> To: "e-gold Discussion" <[EMAIL PROTECTED]> Sent: Monday, June 30, 2003 7:39 PM Subject: [e-gold-list] here we go .. > http://www.opinionjournal.com/columnists/rbartley/?id=110003691 > > Now I'm sure everyone here will peacefully agree with this... > > > -- > > --- > You are currently subscribed to e-gold-list as: [EMAIL PROTECTED] > To unsubscribe send a blank email to [EMAIL PROTECTED] > > Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses. --- You are currently subscribed to e-gold-list as: [EMAIL PROTECTED] To unsubscribe send a blank email to [EMAIL PROTECTED] Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses.
