Currencies, Capital Flows and Crises

This book offers an objective analysis of exchange rates, emphasizing financial capital flows over trade. It combines economic theories with psychology to explain currency movements and financial crises, challenging traditional views.

Currencies, Capital Flows and Crises offers a fresh perspective on the dynamics of exchange rates and the movement of portfolio capital. The author, John T. Harvey, challenges traditional views by positing that financial capital flows, rather than international trade, are the primary drivers of currency fluctuations. This approach is grounded in the intellectual legacies of notable economists like John Maynard Keynes and Thorstein Veblen, while also incorporating insights from modern psychology to develop innovative theories in international monetary economics.

The book critically examines established theories surrounding exchange rates and contrasts them with a new framework that emphasizes the psychological factors influencing market participants. Harvey's model is rooted in Keynesian macroeconomic analysis, intentionally setting aside assumptions of full employment and balanced trade. This allows for a more nuanced understanding of how market expectations shape currency movements over time. The author meticulously details how participants form their mental models to predict future exchange rate trends, integrating these insights into the broader economic narrative.

Additionally, the text addresses the phenomenon of currency crises, identifying key tension points that can trigger economic downturns in thriving markets. By comparing theoretical models with historical events, such as the dollar's fluctuations and the crises in Mexico (1994) and Asia (1997), Harvey provides a comprehensive analysis that illuminates the complexities of global finance. This book serves as a valuable resource for financial economists, offering new tools for understanding the intricate relationships between currencies, capital flows, and economic stability.