Welcome to Dr Lincoln's blog

Welcome for visiting my blog. Hope you enjoy the visit and always welcome back again. Have a nice day!


'Dirty float' may be better than the markets

Comments on Vanessa Desloires "'Dirty float': how China manages its currency", 12/08/2015

While the use of "dirty float" puts a very negative sound to the managed float of a currency, the practice itself may not necessarily be dirty or worse than a free float or completely determined by market. This is because nowadays, speculations in the currency markets are so rampant that for most of the time a currency's market value does not reflect its value determine by economic fundamentals. In addition, there is the phenomenon of overshooting of exchange rate. Those two added together means very large, excessive and persistent deviations of a currency from the economic fundamentals of the home economy.

Economic policies aim at manage the economy so it is stable at full employment with low inflation.

Why shouldn’t the exchange rate be managed to make it stable and reflect the underlying economic fundamentals?

I think it should. Then it comes to the managed floating, the so called dirty floating.

Viewed from this perspective, the managed floating should be commended as opposed to being called dirty float, as long as it is at or close to the economic fundamentals.

Of course, to achieve the goal of being at or close to economic fundamentals requires a clear and transparent mechanism to operate the float and value a currency, so it is not used to gain trade advantages over others by under value the currency too much.

In summary, it may be better to have a relatively stable exchange rate regime based on a clearly defined and transparent framework for many countries if the so wish to do so.

The extreme thinking of market determined exchange rate is always better than the managed one is an illusion when the market does not work well enough to reflect economic fundamentals.

No comments:

Post a Comment