Keynes at the periphery: Currency hierarchy and challenges for economic policy in emerging economies

Abstract

While the Post Keynesian literature offers a rather clear concept for growth-oriented policies, it is necessary to adapt them for peripheral emerging economies. We base our analysis of an appropriate Keynesian policy mix for these countries on the concept of currency hierarchy, where the currencies of peripheral emerging economies have a lower liquidity premium than the currencies of advanced economies. Under these conditions, we argue that domestic economic policy coordination should lay a major focus on a low policy rate and, especially, a competitive exchange rate for, at least, a balanced current account, in order to prevent capital flows boom-bust-cycles with subsequent financial crises and their damaging effects on employment and growth. We conclude that it is a rather ambitious and long term goal to climb up the currency hierarchy, especially under the current conditions of financial globalization.

Determinantes Do Repasse Cambial: Uma Resenha Com Foco No Caso Brasileiro

“…2 Wray (1998). 3 Prates (2005), Rossi (2010), Kaltenbrunner (2015), Paula et al (2017), Fritz et al (2018). preços à taxa nominal de câmbio.…”

“…Wray (1998) oferece uma clara explicação da existência de hierarquia dos passivos monetários em uma economia que pode ser aplicada às moedas no sistema monetário global, dado que não há dúvida de que o dólar tem liquidez internacional muito superior à do real. Ver tambémPaula et al (2017) eFritz et al (2018).6 Na literatura internacional aparece nos papers relacionados a international trade invoicing, na qual uma revisão e novas evidência empíricas podem ser vistas em Golberg e Tille (2016).7 Campa e Goldberg (2005) chegam a citar o caso brasileiro como exemplo de elevado choque cambial (transição do câmbio fixo (crawling peg) para o flutuante em janeiro de 1999) que não levou a uma elevação proporcional nos preços ao consumidor, o que denotaria a queda do repasse cambial nas últimas décadas.…”

Global currency hierarchy and national policy space: a framework for peripheral economies

“…As detailed by Paula et al (2017), when applying this equation on the international level, currencies are hierarchically positioned according to their degree of liquidity l, which relates to their ability to perform the three functions of money internationally (see figure 1). Therefore, when we apply Keynes' attributes to the different currencies, the key currency, currently the US fiduciary and flexible dollar, is placed at the top of the hierarchy as it has the highest l. The currencies issued by the other centre countries, labelled Northern currencies, are in intermediate positions as they are also liquid currencies, yet with smaller l than the key currency.…”

“…Moreover, it also constrains the leeway for expansive fiscal policy over the cycle because within this framework, this policy is subordinate to the monetary policy. Therefore, in order to reach this double target, macroeconomic policies should be carefully coordinated, giving priority to instruments that stabilize domestic demand over the cycle (see Paula et al, 2017). Yet, the relative change of the position within this hierarchy is not a short-term, easy goal that would be met through the adoption of a standardized set of policies.…”

“…In this paper, we assume a Keynesian-structuralist perspective on the origins and implications of currency hierarchy as is developed originally in the work of Paula et al (2017). In section 2, we introduce and develop such concepts, while in section 3, we discuss the structural limitations of policy space for the countries at the bottom of the CH.…”