About Ronald McKinnonRonald McKinnon is the William D. Eberle Professor of International Economics at Stanford University, where he has taught since 1961. He has been a consultant to central banks and finance ministries the world over, including international agencies such as the World Bank, the Asian Development Bank, and the International Monetary Fund. His fields of specialization are international economics and development finance. His most recent research and consulting interest has been on the People’s Republic of China.
By Ronald McKinnon. Posted July 26, 2012
The international dollar standard is malfunctioning. The Fed’s reduction of the interest rate on Federal Funds to virtually zero in December 2008 (a move that was followed by major European central banks) exacerbated the wide interest rate differentials with emerging markets and provoked world monetary instability by inducing massive hot money outflows by carry traders into Asia and Latin America. The disruption could be partially justified if it had helped the United States recover from the 2008–2009 financial crisis. However, evidence suggests otherwise. Speculative money flooding into emerging markets by “carry traders” causes local currencies to be overvalued.
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