Discussion of Academic Views of Capital Flows: An Expanding Universe, Capital Flows and Exchange Rates, Explaining Global Market Turmoil: A Fresh Perspective on its Origins and Nature

For some time now, I have been hearing of a mythical place where quite impossible things seem to happen. It is a country the size of a continent, but with a small and very open economy that allows its currency to fluctuate to the tune of its quite erratic terms of trade. It can do so without kindling fears of inflation or wreaking havoc on bond prices. It is a country where short-term interest rates are set with little regard to the exchange rate. Although residents know that the currency will depreciate if the terms of trade deteriorate, they do not run away from domestic assets in order to diversify their already high-income risks. In fact, it has been said that this country has even convinced foreigners to buy bonds denominated in that unstable domestic currency to the point that most of its external debt is de facto denominated in the country’s own currency!