Currency Cycles and Productive Specialization
Abstract
Post-Keynesians have traditionally emphasized the importance of monetary and financial trends in shaping outcomes in real markets. Keynes himself emphasized the role of liquidity preference in industrialized countries, but except for the literature on “Minskyan cycles”, more recent debates rather deal with the impact of exchange rate misalignments on international trade, economic activity, and growth, especially in developing and emerging economies. For example, with the “new developmentalist” thesis on overevaluation as a cause of premature deindustrialization, or with the identification of a “financial Dutch disease”.These strands of literature however, typically consider the financial cycle and/or currency cycles as driven by exogenous factors (and often volatile ones, implying ‘cycles’ only in a loose, non-geometrical sense).
By contrast, in this work I formalize a model of endogenous currency cycles, which cause a key currency to move persistently in one direction over extended periods of time, and then to endogenously switch direction. The model is inspired by Biasco (1987), who provides a detailed conceptual framework but stopped short of developing the model. Following Biasco, the main real consequence of these cycles (beside on aggregate activity levels) is on countries’ specialization.
The model distinguishes between a high-elasticity and a low-elasticity sector and, while the relative share of the two sectors varies along the cycle, the irreversibility of investments implies a distinct time trend over time, with dualism arising between countries with low specialization, whose growth depends on periods of relative currency undervaluation, and those with high specialization, which are less subject to the vagaries of exchange rate movements.
Preliminary time series evidence suggests that the model applies to large, “key” currencies of the richer economies.