Post Keynesian theories of exchange rate determination: a critical survey†

Abstract

The market for foreign currency is the largest on the planet. One would imagine that Neoclassicism would have an easy time explaining this prime example of market capitalism, but the opposite has been true. They have struggled to develop even one model that captures the salient features of the international monetary system. Fortunately, theirs is not the only game in town. For the past thirty years or so, Post Keynesian scholars have been developing theories of exchange rate determination that do explain the currency price volatility, chronic payments imbalances, and financial crises characteristic of the post-Bretton Woods period. That work has been quite varied, including discussions of agents’ expectation formation processes, technical trading rules, currency hierarchies, Minskyan processes, stock-flow consistency, speculation, financial capital flows, and more. In many ways, however, this is still a relatively new literature, one in need of careful summary and review so that we may take stock of what has been accomplished thus far and consider what remains to be done. This critical survey provides a starting point for this process.