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The Insulation Argument in Modern International Economics: A Critique

Domenii publicaţii > Economie + Tipuri publicaţii > Articol în revistã ştiinţificã

Autori: Bogdan Glãvan

Editorial: Quarterly Journal of Austrian Economics, 8(3), p.3-19, 2005.


Among the arguments advanced by mainstream economists in favor of independent fiat currencies, the thesis that the exchange rate completely insulates the economy from changes in foreign prices has a central importance. The occurrence of changes or shocks emanating from foreign markets is not a sufficient condition, however, for monetary nationalism. Another condition for the independent fiat currencies to be desirable in mainstream literature, are the “asymmetrical” effects these shocks can have on different economies. The aim of this paper is to criticize the foundation and the relevance of the insulation argument. In what follows, I will attempt to show that: (1) The favor flexible exchange rates enjoy in the literature is in part a result of the confusion between devaluation and free exchange rates; (2) Asymmetric shocks cannot provide a basis for the insulation argument, for their meaning is either a definitional truism or simply absurd; (3) Devaluation cannot offset the impact of foreign trade shifts on the domestic structure of production, and it instead produces additional problems; (4) A policy of monetary nationalism cannot prevent foreign-engineered business cycles from affecting domestic economic conditions, even if this is the only (but neglected) instance when a case for insulation could be rightly made.

Cuvinte cheie: politicã monetarã, protecţie, curs de schimb, economie mondialã // monetary policz, insulation, exchange rate, international economics