Oh, well, that’s that then

Nigel Dawson says:
September 19 2021 at 1:38 pm
Surely even the most basic economist must know that FX rates are primarily driven by interest rates in different currencies, not productivity?

Richard Murphy says:
September 19 2021 at 2:40 pm
They’re not

That’s why no one knows that



It is conventional in macroeconomics textbooks to see the interest rate
as the price of money and to consider it in the context of the supply of
and demand for money. Here, however, we consider the interest rate
alongside the exchange rate. The reason for this is that because capital
can move freely into and out of the country, UK interest rates are
closely linked to interest rates in international markets, particularly
those in the USA, Europe and Japan. Because investors, in deciding
where to place their funds, are choosing between assets denominated in
different currencies, this leads to a close connection (explored in detail
later in this chapter) between interest rates and exchange rates. In an
open economy such as the UK, the link between interest rates and
exchange rates is stronger and more direct than the link between
interest rates and the money supply. We start with interest rates, and
then consider exchange rates.

It’s astonishing what he doesn’t know, isn’t it? And yet he attempts to advise governments?

And we’ve the international Fisher effect, and interest rate parity to think about as well.

Ho Hum.

12 thoughts on “Oh, well, that’s that then”

  1. Crumbs!

    Word has yet to reach proponents of Elynomics that forward contract exchange rates are calculated on the basis of the spot rate adjusted by the difference in interest rates for those currencies over the period.

  2. Which illustrates the unfortunate fact he is not even a ‘
    ‘basic economist’

    He has no understanding of basic economics and has proven that for the last 15 years beyond peradventure

  3. Bloke in North Dorset

    They’re not

    That’s why no one knows that

    That’s a “nobody I know voted for Nixon” level of dunderheadedness.

  4. An economist from a vegetable family other than solonaceae might look at the connection between interest rates and FX and talk about whether the Bank rate is actually any use in thinking about FX. Very few companies seem to be able to borrow at rates close to what the BoE ordains, for example, and it would be instructive to know why this is so. But he is not really a person who wants to find out. He prefers to dictate. Then again Simon Wrong-Lewis and Chris Dillow also seem to be unaware that governments cannot really borrow money at the advertised rate. Educated fools

  5. That what being a polymath means to the potato – ignorant in many fields. He’s a true Idiot savant minus the savant part.

  6. @bis – “Only two commenter banned in that thread. Is he having a lax day?” -perhaps he’s caught covid again – though would it be the third time or the fourth?

  7. Begs the question who he caught Covid from, moqifen? Since he spends his days alone in his underpants banging on his keyboard, one presumes the cat’s the leading suspect.

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