Chapter 8: The International Economy and Alternative Exchange Rate Regimes
INTRODUCTION Up to this point the discussion has assumed the existence of a single selfcontained monetary network dominated by a central bank-type institution whose liabilities represent both the standard of value (unit of account) and the agreed ultimate means of payment (medium of settlement) of the system. The liabilities of this institution are the base of an inverted pyramid of other ﬁnancial assets which may have heterogeneous risk characteristics, but which are generally acceptable as alternate exchange media on varying terms. The interest rate policy of the central bank sets the tone for the structure of interest rates throughout the system. In the present chapter, however, the closed economy assumption of a single ﬁnancial network will be dropped, and the focus of the discussion will be the coexistence of a number of competing ﬁnancial networks, each with a diﬀerent standard of value and a diﬀerent ﬁnancial centre. This then immediately raises issues involving the interaction of the competing centres, the rates of exchange between the diﬀerent standards of value, and contradictions between the interest rate policies prevailing in each bloc. FINANCIAL NETWORKS AND NATIONAL ECONOMIES Historically, the competing networks have been identiﬁed with the boundaries of nation states, for the simple reason that the coercive power of the state, including such devices as the power of taxation and legal tender laws, has made state-owned or state-dominated central banks the natural candidates for the role of the ﬁnancial centre in each jurisdiction. In many cases, therefore, discussion...
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