CURRENCY CYCLES OF THE MAJOR WORLD CURRENCIES

Post-Keynesians emphasize the importance of monetary and financial trends in shaping outcomes in real markets. Recent debates focus on emerging or developing countries and typically consider financial dynamics as driven by exogenous factors (often volatile ones, implying ‘cycles’ only in a loose, non-geometrical sense). By contrast, in this work we formalize a model of endogenous currency cycles, which cause a key currency to move persistently in one direction over extended periods of time, and then to endogenously switch direction. The model is inspired by Biasco (1987), who provides a detailed conceptual framework but stopped short of developing a model. In his analysis, capital flows are at least partly motivated by expectations of GDP growth. In turn, inflows of capital determine appreciations of the exchange rate, which negatively impacts on GDP growth. The interaction of these two variables endogenously produces a cyclical dynamic —which could be reinforced (or rather complemented in the short run) by endogenous reactions of monetary policy, and the interaction of fundamental and momentum traders. Time series evidence for the main four reserve currencies (US dollar, euro, yen, and GBP) suggests that the model applies to large, “key” currencies of the richer economies.