Money, Financial Instability and Stabilization Policy

Money, Financial Instability and Stabilization Policy

Edited by L. Randall Wray

Money, Financial Instability and Stabilization Policy consists of original articles by leading Post Keynesians, Kaleckians and other heterodox economists from the developed and developing world. Post Keynesian literature has long been associated with the study of money, financial markets and financial instability. Indeed, this is perhaps the area to which Post Keynesians have made the greatest contributions. The authors to this volume present an overview of the latest research on monetary theory and policy, financial markets, and financial instability coming out of the Post Keynesian school of thought. They provide an indication of the wide-ranging interests and of the truly international scope of Post Keynesian research. The first half of the volume is theoretical, while the second half includes papers that are either empirical or more focused on specific concerns.

Chapter 10: Competition, Low Profit Margin, Low Inflation and Economic Stagnation

Arturo Huerta

Subjects: development studies, development economics, economics and finance, development economics, post-keynesian economics


Arturo Huerta Financial Liberalization Imposes ExchangeRate Stability Developing countries (particularly in Latin America) undertook liberalization of their financial markets in order to attract foreign funds to cover internal funding shortages, problems with the current-account deficit of the balance of payments, and problems related to economic growth. Limitations on short-term capital flows were eliminated to allow unrestricted movement, a prerequisite imposed by capital in order for funds to flow into a particular country. Yet the free flow of capital tends to bring changes in the currency, capital and money markets. With financial liberation, changes in expectations for the economy, or exchange rate behaviour, or internal versus external interest-rate differentials, can lead to rapid reversals of capital flows. Financial liberalization requires stability in the exchange rate in order to avoid speculative practices and losses in financial capital, which occur when the currency in which investment occurs is devalued. Thus bringing down inflation and exchange-rate stability go hand-in-hand with financial liberalization. The latter cannot happen without conditions of stability being met, insofar as, in a context of uncertainty regarding the exchange rate or profitability of investments in a country, the free movement of capital would act against currency and financial markets, which in turn would deepen exchange-rate instability and provoke a crisis. Thus countries with liberalized financial markets have been forced to seek low inflation, exchange-rate stability and conditions of domestic profitability, in order for capital to flow into a country and remain there. The economic situation today in Latin American countries is...

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