The problem with the United Kingdom’s growing budget deficit and public debt is not that they condemn the currency to being weak or strong. It is that they can constrain monetary policy, create uncertainty that spills into financial markets, complicate the inflation-unemployment tradeoff, and hinder long-term growth.
LONDON – At university in the United States in the early 1980s, I was taught the iconic Mundell-Fleming macroeconomic model, which predicts that a currency’s exchange rate will appreciate in response to an increase in the issuing country’s budget deficit. The Asians, Africans, Latin Americans, and southern Europeans in the room reacted in unison, protesting that it is not like that: any sensible trader will dump the currency of a country whose government is about to engage in massive borrowing.
LONDON – At university in the United States in the early 1980s, I was taught the iconic Mundell-Fleming macroeconomic model, which predicts that a currency’s exchange rate will appreciate in response to an increase in the issuing country’s budget deficit. The Asians, Africans, Latin Americans, and southern Europeans in the room reacted in unison, protesting that it is not like that: any sensible trader will dump the currency of a country whose government is about to engage in massive borrowing.