Exchange Rate Cooperation - Essay Example

An analytical essay of exchange rate cooperation Neoliberal institutions and capital mobility hypothesis provide insight into the dynamics of European Community exchange rate cooperation. The institution and capital mobility hypothesis provide incomplete explanations of the processes that drive institutional creation and variations in policymaking based on the dynamics of exchange rate cooperation. The policy makers provide stability in exchange rate cooperation across the world. Moreover, neoliberal institutions explain the reason why policymakers and initiated exchange rate cooperation develop specific institutions. On the other hand, capital mobility hypothesis explain policymakers choice of exchange rate stability and monetary policy autonomy. Additionally, they explain European Community monetary policies congregated within Bundesbanks price stability standard. However, there are weaknesses to the development of the exchange rate cooperation. The weaknesses develop from the creation and evolution of exchange rate institutions and the policymakers’ ability in stabilizing exchange rates within the institutions. In solving these problems, domestic politics concerned with models of monetary policies and bargaining power needs to be developed. Exchange rate cooperation revolves around the dynamics of neoliberal institutions and capital mobility hypothesis. It is vital for the institution and capital mobility to have proper legislatives in monetary politics to enable for the stability of exchange rate cooperation. Key theoretical accounts In the book, Currency of Ideas and Monetary Politics, Kathleen R. McNamara argues that neoliberal consensus theory is not a function that directly raises capital; instead, it is the product of European political leaders’ interpretations of shared ideas (Kathleen 7). Additionally, an example of monetarist paradigm and German policy is used in explaining neoliberal consensus. Kathleen uses paradigms in explaining exchange rate cooperation across the world. Moreover, Kathleen argues that international economy shapes the terrain in which politics unfold. The interpretation of the structure and ideational processes dictate crucial choices of policy content and form. The book cautions against the making of assumptions about effects of economic interdependence on political results without tracing linkages of rising trade and capital flows. This uncertainty has very crucial consequences in the politics of monetary cooperation. Uncertainty obscures the distribution of effects in differences of exchange rate regimes (Kathleen 8). It has the high potential of depolarizing policy process by decreasing societal pressures for specific policies and insulating policy makers from public scrutiny. Exchange rate cooperation is highly affected by the changing dynamics of policies, political power, trades and capital flows. The policies put in place by international monetary institutions such as international monetary fund (IMF) tend to control exchange rate cooperation across the world. The policies affect the movements of money from one economy to the other. The developments of the policies are by political powers that tend to control the whole process of policymaking. The interference of exchange rate cooperation by political bodies is what Kathleen explains as neoliberal consensus since the making of the policies revolves around interpretations of shared ideas political individuals. They make policies in exchange rate cooperation without engaging the trends of trade and capital flows in the globe. Trade and capital flows across the globe determine the type of exchange rate cooperation that need to be applied in an economy. Moreover, trading activities and capital flows give exchange rate cooperation across the world an opportunity of growing. The growth of exchange rate cooperation decreases since it is affected negatively by poor policies made by political powers insulating the growth of exchange rate. Therefore, for the growth exchange rate, cooperation political interference withdraws to allow trade and capital flows to grow. This has a positive impact to exchange rate cooperation since poor political policies are not developed. On the other hand, Beth A. Simmons, in the book, who adjust? Domestic Sources of Foreign Economic Policies argues that deductive models theories based on sophisticated economic models and abstraction explains the dynamics of exchange rate cooperation especially in the world wars. Moreover, monetary instability, economic nationalism and commercial collapse are the main effects to the lack of exchange rate cooperation across the globe (Beth 3). Martin Fieldstein, former chairperson of the council of economic advisers (CEA), support Beth’s arguments based on the observations of G7 on international monetary cooperation. He published a series of articles and made speeches on the practice of international monetary coordination criticizing exchange rate cooperation for the following reasons. First, he argues that G7 practice in targeting nominal exchange rate is not appropriate. This is because external balances depend on real and not nominal exchange rates. Secondly, models uncertainty in international economics outweighs the benefits of policy coordination based on costs (Beth 3). Fundamental differences in the way the world economy works produces little results of coordinated policy performance. Beth arguments entail sophisticated economic models and nominal exchange rates. The models tend to develop structures, which help in the operations of exchange rate cooperation successfully. Moreover, the models help G7 countries, who are the main determinants of exchange rate cooperation to come up with proper strategies that tend to bring developments in exchange rate cooperation. Besides, the models prevent any external interference in the exchange rate cooperation in a variety of ways. Additionally, uncertainties in exchange rate cooperation lack experience when the models properly develop in a coordinated system. Consequently, exchange rate cooperation growth involves real exchange rates as compared to nominal exchange rate. It is important for economies to concentrate on real exchange rates rather nominal exchange rates for quality development of exchange rates. However, both Kathleen and Beth argue that political policies prevent the developments of exchange rate cooperation. The policies tend to lean on one side to favor political powers instead of promoting exchange rate cooperation. It is fundamental to develop policies that are relevant in order to have healthy exchange rate cooperation across the world (Beth 3). Evidence of theoretical accounts Kathleen theoretical accounts entail the effects of trade and capital flows within the economy based on exchange rate cooperation. The trend of trading activities determines exchange rate cooperation (Kathleen 8). High trading activities develop the growth of exchange rate cooperation while low trading activities downplay exchange rate cooperation. It is vital for economies to take care of the developing trading activities to have proper exchange rate cooperation. Beth argues that theoretical evidence incorporates the effects of nominal and real exchange rates. Countries that focus on real exchange rate have the potential of growing with their exchange rate cooperation while focus on nominal exchange rate deploys exchange rate cooperation. It is fundamental for economies to focus on trading, capital flows and real exchange rate for quality development of exchange rate cooperation across the globe. Conclusion The growth of exchange rate cooperation revolves around trades, capital flows and real exchange rate. The coordination of the three aspects develops well-structured exchange rate cooperation for an economy. Besides, political powers need regulation across the world since they have great effects to exchange rate cooperation. Exchange rate cooperation growth is fundamental since it brings development in economies. Works cited Beth A. Simmons: Who Adjusts? Domestic Sources of Foreign Economic Policy During the Interwar Years: illustrated, reprint; Princeton University Press, 1997,110 pages Kathleen R. McNamara: The Currency of Ideas: Monetary Politics in the European Union: illustrated, revised, Cornell University Press, 1998, 185pages Read More