Is the Foreign Exchange Rate a Constraint on Full Employment Policies in Australia?
Peter Kriesler and J.W. Nevile, Centre for Applied Economic Research, University of New South Wales, Australia. The effects of the foreign exchange rate on both prices and quantities are widespread, making it one of the most important prices in our economy, but it is very difficult to predict how policy will affect it. There are many theories about how the exchange rate is determined, but all the systematic ones are largely irrelevant in today’s world. At different periods in the history of the international economy different motives were dominant among participants in foreign exchange markets. Currently, speculation overwhelms all other reasons for foreign exchange transactions. The theories of exchange rate determination, that have been influential in the past, focus on one or another set of so-called “economic fundamentals”. These are only one of the factors affecting speculation and are often not an important one. Policy makers in even moderately open economies cannot ignore the ef
