I wrote: >>right! trade issues only affect exchange rates in the long run (several >>years) via purchasing power parity -- or via speculator expectations. It's >>trading in assets that's crucial in the short run, not trading in goods and >>services. ... Ellen writes: >The problem with this statement is that so-called long-run tendencies (like >purchasing power parity) aren't likely to turn up unless short-run forces >(real-world trading in acutal historical time) are somehow driving things >in the right direction. I should have made it clear that I don't think that there's a unique and constant long-term equilibrium toward which exchange rates move independent of short-term fluctuations (a neoclassical-type long-term equilibrium). Rather, there is a long-term equilibrium at any specific time which acts as a center of gravity around which short-term equilibria fluctuate -- but the effects of short-term fluctuations can change the center of gravity: for example, the high dollar exchange rate of the early 1980s changed the underlying relative prices that determine purchasing power parity rates. (I think so-called "reverse causation" this works most for big and persistent short-term fluctutions.) In other words, the center of gravity is a moving target. It may also be that there are multiple long-term equilibria at any specific time, so that short-run fluctuations could jump from one center of gravity to another. To talk about that, we'd have to have a fully-specified model. Unfortunately, I left mine at home. ;-) However, that does not deny that issues of the trade of goods has a slow-working effect on actual exchange rates. It's slow-working and constant. (It may be fast-working, but only through the notoriously flaky mechanism of speculator expectations.) A country with relatively slow productivity growth will likely see a long-term slide of its exchange rate over the long haul. Of course, that slowth may be made worse if short-term flucts lead to deindustrialization or something similar. >Efficient market types try desperately to put a good face on foreign >exchange markets by claiming that everything will make sense in the long >run. All real-world evidence contradicts this. I find it most helpful to >regard the exchange rate as a purely speculative variable --hanging by it's >bootstraps. Sometimes speculation is stabilizing, moving to correct >obvious problems of over-and under-valuation. This is what efficient market boosters would have us >believe. Korea, Indonesia, Mexico, et al, were victims of nothing more than >way-overdue market "corrections" to long-run equilibrium. so we generally agree. I wouldn't say that the exchange rate isn't _purely_ speculative, but there's so much speculation that it doesn't really matter. After all, the center-of-gravity exchange rate is strictly speaking unknown and can be affected by short-term speculation. >Then again, sometimes speculation is distabilizing. I would say the won, >rupiah, baht, ruble, peso all fell victim to destabilizing speculators. The >Clinton administration is, just now, arranging a tax-financed, >$30b pay-off to keep destabilizing speculators from bringing down the real. > How much easier (and cheaper) to just control currency trading. It may be cheaper (or rather, more lucrative) to impose a Tobin tax on foreign exchange transactions, but isn't that closing the barn door after the horse has left? But you're probably talking about more politically-acceptable ideas of capital controls. In any event, I agree with you. Jim Devine [EMAIL PROTECTED] & http://clawww.lmu.edu/Departments/ECON/jdevine.html
