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Dysfunctional Union

In: What Drives Global Capital Flows?

Author

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  • Brendan Brown

Abstract

Throughout this volume a recurrent theme has been the power of divergences in savings propensities and investment opportunities between countries to drive global capital flows. A key line of inquiry has been how neutral interest rates vary relative to each other (across currency frontiers) and how equilibrium exchange rates shift in response to the power source (international divergences between savings or investment propensities) being turned up or down. Within a monetary union the power source driving capital flows between the member countries and between them (the union as a whole) and the rest of the world is the same (as for the case of sovereign monetary areas). The possibility of virtually riskless arbitrage, however, keeps nominal interest rates (measured with respect to assets of identical credit risk) at identical levels to each other in all member countries (of the monetary union). The analyst of capital flows focuses on how the underlying divergences (in savings propensities and investment opportunities) influence the determination of the neutral interest rate for the whole union and the movement of national price levels relative to each other (within the union).

Suggested Citation

  • Brendan Brown, 2006. "Dysfunctional Union," Palgrave Macmillan Books, in: What Drives Global Capital Flows?, chapter 7, pages 182-214, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-62729-1_7
    DOI: 10.1057/9780230627291_7
    as

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