Value,Distribution and Capital: A review essay

This article identifies two possible alternative approaches to questions of exchange rate policy within a broadly keynesian frame work. One argument is that the implementation of keynesian’ policies in single jurisdiction requires a ‘managed’ or ‘dirty’ float, while the other would stress the benefits of a greater degree of nominal exchange rate stability as a means of reducing uncertainty and the volatility of expectations. We argue in favour of the former, on the grounds that it will not be possible to pursue a lsquo;cheap money’ policy to reduce real interest rates in a single jurisdiction unless there is some room to manoeuvre on exchange rates. A ‘fixed but adjustable’ exchange rate regime is less attractive because of the potential for deflationary bias in a hegemonic system with fixed exchange rates. Also, the politicization of exchange rate policy in such an environment makes necessary adjustments, particularly in a reflationary direction, more difficult than they otherwise would be. The recent history of the ERM in Europe provides examples of both phenomena.