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Capital Flows: The Dollar and Global Capital Allocation

In: Financial Markets and Economic Performance

Author

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  • John E. Silvia

Abstract

Good due diligence in foreign investment reflects a careful balance of risk and reward. Yet in so many cases, the South Seas Bubble being one of the earliest examples, investors place financial capital without a proper perspective of the expected returns and the risk involved. The U.S. dollar, expressed as an exchange rate for any other currency, is a price, in fact a relative price. Any exchange rate today reflects investor expectations for growth, interest rates, and equity returns. Numerous historical attempts to set a fixed exchange rate (Bretton Woods) are honorable but the economic forces in the global economy are unbending. These fixed exchange rates set up a disequilibrium problem that can only be resolved by significant moves in inflation, interest rates, or economic growth—or a breakdown of the exchange rate peg. Moreover, any attempt to target an exchange rate opens the markets to spillover and repercussion effects that once again will alter equilibrium values in other markets.

Suggested Citation

  • John E. Silvia, 2021. "Capital Flows: The Dollar and Global Capital Allocation," Springer Books, in: Financial Markets and Economic Performance, chapter 0, pages 307-344, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-76295-7_9
    DOI: 10.1007/978-3-030-76295-7_9
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