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
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?