Advancing Regional Monetary Cooperation: The Case of Fragile by Laurissa Mühlich (auth.)

By Laurissa Mühlich (auth.)

This ebook examines nearby financial cooperation as a technique to reinforce macroeconomic balance in constructing international locations and rising markets. Interdisciplinary case stories on Southern Africa, Southeast Asia and South the USA supply a cross-regional viewpoint at the viability of such strategy.

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Considering flexible exchange rates as a superior international framework relates back to the traditional purchasing power parity (PPP) theory. Based on the assumption of perfect markets and perfect substitutability of different currencies, PPP theory states that exchange rate movements reflect economic fundamentals, such as the fiscal budget, the current account balance, the interest rate, and – first and foremost – the inflation rate. Instability in macroeconomic fundamentals would 17 18 Advancing Regional Monetary Cooperation be reflected in unstable exchange rates, opening room for arbitrage that would essentially stabilize exchange rates by bringing them back to their equilibrium rate.

Hence, a country could choose between monetary policy autonomy with flexible exchange rates and monetary stability with fixed exchange rates. 1 However, the binary choices laid out by the trilemma rarely apply clearly, because countries opt for in-between combinations to achieve degrees of each objective. In addition, the set of policy objectives may be changing in view of changing international conditions. , 2008). 2 Hence, a fourfold choice between conflicting policy objectives is made with an exchange rate regime.

Compares this situation to a market oligopoly in which national monetary authorities seek to preserve or promote the Global Instability and “Monetary Regionalism” 21 competitive value of the currency they issue in international markets. However, such competition occurs between rather unequal currencies in terms of their quality and functions within the international monetary non-system (cf. Krugman, 1984; Cohen, 2000; Cohen, 2004). Thus, it brings an inherent instability to international monetary relations compared with an international monetary system with a clearly defined framework for monetary policy intervention, including exchange rates.

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