Selasa, 04 April 2017

Floating rates?

I was interested to read in the Financial Times, "Iceland weighs plan to peg krona to another currency":

Iceland’s finance minister has admitted it is untenable for the country to maintain its own freely floating currency....Benedikt Johannesson told the Financial Times that the Nordic island of just 330,000 people would look at options to link Iceland’s krona to another currency, most likely the euro or pound.
“Is the status quo untenable? Yes. Everybody agrees on that. We’d like to have a policy that would stabilise the currency. It’s really not good when a currency fluctuates by 10 per cent in the two months since we took over,” said Mr Johannesson, who became finance minister in January. 
The main thing is if you want to peg against a currency, do it against a currency where you do business. Once you decide on a currency, that will also change the future. You will do more business with that area,” he added, pointing to Denmark’s experience of doing more business with Germany after pegging its currency first to the Deutschmark and then the euro.
This is interesting in the context of Conventional Wisdom, which says the euro is a bad idea, and every tiny country needs its own currency, to devalue any time there is a "shock." In this view, Iceland is a great success because it did devalue after its banking crisis. I am a skeptic, largely favoring a common standard of value. Greece did not become a growth tiger from its previous umpteen devaluations. I'm interested that even the supposed success story for devaluation does not see it that way.

Update (via marginal revolution) here at Bloomberg. The idea is controversial.

Everyone wants a float after the fact, to devalue their way out of trouble. But everyone should also want a peg before the fact; the firm commitment that you will not devalue your way out of trouble makes international investment and trade flow much better.