Money in International Exchange: The Convertible Currency System

by Ronald I. McKinnon

Overview

How do nations trade when no purely international money exists? This book describes how the use of national currencies, only some of which have the important international property of being convertible, allows most of world trade to be effectively monetized rather than bartered. Professor McKinnon's analysis represents the first attempt to focus on the microeconomic and monetary aspects of international exchange, and addresses unresolved problems in securing mutual monetary adjustment among the world's great trading economies.

Focusing on monetization of international trade per se, the text analyzes common financial practices of merchants and manufacturers, commercial banks, and central banks. Interesting new data indicate how particular national monies are selected as currencies of invoice for exports, how the conventions of extending trade credit from buyer to seller have evolved from the gold standard era, and what banking institutions are necessary to allow traders to hedge themselves at reasonable cost against currency fluctuations. The author also critically reviews public policies that either support or obstruct the world's money machine, and demonstrates why the underlying monetary order and observed conventions of exchange cannot be taken for granted.

Product Details

ISBN-13:	9780195365405
Publisher:	Oxford University Press
Publication date:	06/21/1979
Sold by:	Barnes & Noble
Format:	eBook
File size:	4 MB

Table of Contents

1	In Search of International Money: The Convertible Currency System	3
	Convertibility and Commercial Trading: Official Restraints on Asset Choice	4
	The Interbank Market for Convertible Currencies	9
	The Monetary Conditions for Long-Run Exchange Stability	13
	Technical Note: Foreign Exchange Quotations	21
2	Intervention by Central Banks In A World of N Currencies	27
	N Currencies and N - 1 Exchange Rates	28
	Official Parities and Triangular Arbitrage	30
	The Choice of the Nth Currency	34
	The United States Dollar as a Vehicle Currency for Commercial Banks	38
	Inconvertibility, Less Developed Countries, and Pegged Exchange Rates	39
	Fixed versus Floating Exchange Rates	43
3	Currency Inconvertibility and the Foreign Trade of Centrally Planned Economies	47
	Central Planning and Commodity Inconvertibility	48
	Multilateral Exchange with the West	50
	Bilateralism within the Council for Mutual Economic Assistance (CMEA)	52
	The Determination of Foreign Trade Prices in the CMEA	55
	Barter, Command Planning, and Economic Sovereignty	60
	A Gold Ruble?	62
	Full Liberalization and the Monetary Conditions for Exchange-Rate Stability	64
4	Hedging by Exporters and Importers	68
	The Currency of Invoice: Tradables I and II	72
	Currency Risk and the Structure of Trade Credit	78
	Inventory Valuation Adjustment versus Forward Covering	80
	Financial Predominance, Tradables II, and the Optimum Double Hedge	83
	Technical Note: Optimum Forward Cover	89
5	Forward Covering and Interest Arbitrage in Imperfect Capital Markets	94
	The Trader's Liquidity and Spot versus Forward Covering	95
	The Empirical Magnitude of Forward Transacting	98
	Hedging Pressure and Bias in the Forward Exchange Rate	101
	The Importance of Covered Interest Arbitrage	104
	Forward Market Equilibrium and Interest-Rate Parity	108
	Imperfections in the Supply of Arbitrage Funds	110
	Short-Term Capital Flows and the Public Interest	112
	Technical Note: Covered Interest Arbitrage	114
6	Purchasing Power Parity	117
	The Law of One Price and the Absolute Version of Purchasing Power Parity	118
	Relative Purchasing Power Parity and the "Real" Exchange Rate	121
	Some Bilateral Statistical Comparisons	123
	Multilateral Comparisons of Effective Exchange Rates and Prices	128
	Deviations from the Law of One Price under Fluctuating Exchange Rates	133
	Implications for Trader Hedging	136
	Per Capita Income Comparisons and Exchange-Rate Conversions	137
7	Speculation	142
Part I	Floating Exchange Rates among Convertible Currencies	144
	On Aggregating Open Positions over All Maturities	145
	The Demand for Stabilizing Speculation and the "J" Curve	148
	The Supply of Stabilizing Speculation	155
	Banking Risk versus Currency Risk	156
	Multinational Corporations and Other Nonspeculators	159
	Speculating without International Money	160
Part II	Pegged Exchange Rates and Speculation against Central Banks	163
	Leads and Lags	166
	Changing the Currency of Invoice	169
	Official Speculation and Exchange Controls	170
8	Fluctuating Exchange Rates, 1973-1978: A Qualified Monetary Interpretation	176
	Keynesian Liquidity Preference and the Rate of Interest in an Open Economy	177
	Foreign Exchange Dealers and the Domestic Money Market	181
	The Interest Elasticity of the Liquidity-Preference Function	184
	Exchange-Rate Fluctuations under Full Information	187
	Uncertain Expectations	192
	Optimum Currency Areas	192
	Intervention by Central Banks: A Concluding Note	195
9	The Eurocurrency Market	197
	Regulatory Asymmetry: A Potted History	200
	The Mechanics of Transacting and the Scope of the Market	207
	Problems of Statistical Measurement: Some Conceptual Difficulties	210
	The Foreign Exchange Aspect: Covering and Interest Arbitrage	213
	Liquidity Creation and Domestic Financial Intermediation	218
	International Capital Transfers	222
	A Concluding Note on Regulation	230
10	Monetary Unions and Fixed Exchange Rates	231
	Secular Growth in the Money Supply and the Prices of Tradable Goods	233
	Official Intervention and Nonsterilization	238
	The Symmetry Rule and the Aggregate Monetary Base	240
	On Flexing the System: Discounting and Short-Term Capital Flows	241
	Concluding Note	247
11	America's Role in Stabilizing the World's Monetary System	248
	The Marshall Plan and the Remonetization of Western European Trade (1948-1959)	250
	Realization of the Bretton Woods Agreement and the Dollar-Gold Exchange Standard (1959-1968)	254
	Uncertainly Pegged Exchange Rates and the International Transmission of Inflation (1968-1973)	261
	Freely Floating Exchange Rates (1973-Present)	267
Appendix	Proposals for International Monetary Reform	270
	On Extending Currency Convertibility to Less Developed and Centrally Planned Economies	271
	A Commodity-Reserve Currency?	272
	Artificial Currency Units and Special Drawing Rights	279
	The Seigniorage Problem and the Link to Less Developed Countries	283
	Name Index	293

Editorial Reviews

"Ronald McKinnon is a seminal figure in the development of modern international monetary economics, but also an iconoclast with a distinctive view. This book is as good a summary statement as any of 'McKinnonomics.' Well worth reading as always."—Barry Eichengreen, George C. Pardee & Helen N. Pardee Professor of Economics and Political Science, University of California, Berkeley

"Ron McKinnon has written a masterful summary of the attractiveness of the U.S. dollar to foreign central banks and investors, and why the dollar standard has survived and flourished despite the challenges from the SDR, the Euro, the Japanese yen, and presumably the Chinese yuan. Government institutions and investors in Europe, Latin America, and Asia buy U.S. dollar securities because these purchases satisfy their interests; the 'dollar is the best game in town'. The paradox is that the U.S. payments deficit is a sign of the strength of the U.S. dollar."—Robert Z. Aliber, Professor of International Economics and Finance Emeritus, Booth School of Business, University of Chicago

"Ron McKinnon is an original thinker, an iconoclast who always challenges the conventional wisdom, and never more so than in this latest book. He argues that the Fed should aim to stabilize the dollar's exchange rate, and that their current policy to push down interest rates to the zero lower bound has been wrong, both for the USA and for the wider world. His arguments may not find favour, but they are cogently and forcefully presented. This book should be a goad for policymakers and a stimulus for everyone else."— Professor Charles Goodhart, Emeritus Professor of Banking and Finance, London School of Economics

From the Publisher