Deficit Owls | MMT: A Gold Standard Or Fixed Exchange Rate Reduces Domestic Policy Space @deficitowls5296 | Uploaded August 2016 | Updated October 2024, 2 hours ago.
Professor L. Randall Wray on why a fixed exchange rate regime (such as a gold standard) reduces domestic policy space. This is because the government must operate its budget and the economy in such a way as to ensure that it grows the amount of reserves it has, or at minimum maintains it.
In an exchange rate peg, the government makes purchases in the market using its own currency and the foreign currency in order to manipulate the price away from its market value. Therefore, the government must ensure that it has the foreign currency it's pegged to. Foreign currency comes into the country when the country exports (sells goods in exchange for foreign currency), and so the country must export more than it imports. The way to do this is with austerity, to keep domestic wages low so your citizens can't import, or to limit imports by law.
With a gold standard, the government must ensure that it has a steady supply of gold to meet conversion demand. So, if the government allowed the money supply to increase (like by deficit spending) this would increase the demand for conversion, and eat into the government's gold supply. To combat this, the government can sell bonds (and allow the market determine the interest rate) to lock that money up so its citizens don't convert.
In both cases, the amount the government can spend is limited. In a fixed currency exchange rate, too much spending will promote employment, cause wages to rise, leading to rising imports, and decreasing the government's foreign currency reserve. In a gold standard, the government must issue bonds when it deficit spends, and must let the market determine the interest rate, potentially leading to a runaway deficit and forced default. But on a floating exchange rate, neither of these can happen: the government can determine how much to spend and what interest rates should be, without fear of defaulting on any promises.
See the whole video here: youtube.com/watch?v=-KRi9nF8BiA
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Professor L. Randall Wray on why a fixed exchange rate regime (such as a gold standard) reduces domestic policy space. This is because the government must operate its budget and the economy in such a way as to ensure that it grows the amount of reserves it has, or at minimum maintains it.
In an exchange rate peg, the government makes purchases in the market using its own currency and the foreign currency in order to manipulate the price away from its market value. Therefore, the government must ensure that it has the foreign currency it's pegged to. Foreign currency comes into the country when the country exports (sells goods in exchange for foreign currency), and so the country must export more than it imports. The way to do this is with austerity, to keep domestic wages low so your citizens can't import, or to limit imports by law.
With a gold standard, the government must ensure that it has a steady supply of gold to meet conversion demand. So, if the government allowed the money supply to increase (like by deficit spending) this would increase the demand for conversion, and eat into the government's gold supply. To combat this, the government can sell bonds (and allow the market determine the interest rate) to lock that money up so its citizens don't convert.
In both cases, the amount the government can spend is limited. In a fixed currency exchange rate, too much spending will promote employment, cause wages to rise, leading to rising imports, and decreasing the government's foreign currency reserve. In a gold standard, the government must issue bonds when it deficit spends, and must let the market determine the interest rate, potentially leading to a runaway deficit and forced default. But on a floating exchange rate, neither of these can happen: the government can determine how much to spend and what interest rates should be, without fear of defaulting on any promises.
See the whole video here: youtube.com/watch?v=-KRi9nF8BiA
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
