Working Papers

Steve Hanke’s Currency Board Fetish

Steve Hanke is nothing if not consistent.  His fetish for currency boards seems to have spilled over into a love of almost any fixed exchange rate regime.  He even has the audacity to call the proponents of greater exchange rate flexibility in East Asia mercantilists. 

Hanke’s defence of HK’s currency board relies on financial instability that occurred more than 20 years ago.  The costs HK’s currency board has imposed on its economy in recent years are completely ignored (Singapore has done relatively better because of its more flexible approach to exchange rate management).

In relation to Japan, Hanke maintains:

Japan has been under mercantilist pressure, primarily from the U.S., to ratchet up the yen’s value against the dollar. Tokyo has complied. Consequently, the economy has suffered from strong-yen-induced recessions and hasn’t yet recovered from the enormous deflation of the 1990s. And the mercantilists in the U.S. remain agitated because Japan continues to register large trade surpluses.

Hanke has things exactly backwards.  Japan has not seen a yen-induced recession since 1985-6.  It has been Japan’s mercantilist attempts at resisting the secular appreciation of the yen, by laundering its massive current account surpluses through USD asset markets, that has landed its economy with a massive overhang of excess capacity.  China risks suffering the same fate, especially if its demographics ultimately turn as toxic as those of Japan.

Given the terrible havoc fixed exchange rate regimes have wrought in emerging market economies in recent years, and within the euro zone, it is incredible that anyone still defends them.  It is even more incredible that these hold-outs for Bretton Woods-era monetary regimes can still find a home within classical liberal think tanks.

posted on 18 February 2005 by skirchner in Economics/Financial Markets

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whats your take on the euro?

do you think it has equivalent problems to fixed exhange rate regimes?

do the benefits outweigh the loss of control of monetary policy by each individual nation?

if yes - why could this not work in other regions?

if no - why is the state the correct size for having a single currency - why not have a nsw dollar and a victorian one…

just thinking aloud here…

Posted by .(JavaScript must be enabled to view this email address)  on  02/21  at  01:56 PM

The euro is a fixed exchange rate regime for member countries, even though it floats against other currencies.  The micro benefits from a single European currency are outweighed by the risk of a monetary policy mistake being propagated across the euro zone.  Germany’s rolling recession is in part a function of an ECB policy that is both too tight, but too loose for other euro zone economies.

The optimal currency area question becomes less important in market-determined monetary systems, where media of exchange and the unit of account are defined by financial intermediaries, not on the basis of nation-state issuing authorities, ie central banks.

Posted by skirchner  on  02/22  at  10:41 AM

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