Competitive exchange rates and macroeconomic theory

Abstract

Mainstream economic theories still suggest that financial markets, including the markets for currencies, smoothly and automatically solve the most complex and enduring economic problem, namely the transformation of today’s savings into tomorrow’s investment or the savings of one country into the investment of another country. It assumes that with efficient financial markets the decision of some people or countries not to spend their revenues but to put part of them aside does not create a major problem. This view faces two major objections. The first one concerns the mechanism of interregional allocation of savings, the second one the functioning of capital markets in general.