Self-Aggravating Movements of Floating Rates
In the foregoing chapters I sought to prove that built-in differences between the trade equilibrium level of exchange rates and their equilibrium levels on other accounts make it impossible for a floating exchange rate ever to settle around its trade equilibrium level. In order that an exchange should behave in accordance with the expectations of those favouring floating exchanges, it would not be sufficient if it adjusted itself to a level at which the import surplus or the export surplus disappeared. There is a continuous process of adjustment of the exchange to the ever-changing pattern of the four equilibrium levels. The object of the present chapter is to show that under the system of floating exchanges movements of exchange rates are liable to be self-aggravating to such an extent that, for that reason alone, they could not settle at their trade equilibrium levels.
KeywordsExchange Rate Equilibrium Level Foreign Exchange Market External Debt Exchange Movement
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