Center and Periphery in International Monetary Relations: Implications for Macroeconomic Policies in Emerging Economies

Abstract

We translate the structuralist center-periphery approach to international currency relations and analyze the implications for macroeconomic policies of emerging market countries. While the Post Keynesian literature offers a rather clear concept for growthoriented policies, it is necessary to adapt them for peripheral emerging economies. We base our analysis of an appropriate Keynesian policy mix for these countries on the concept of currency hierarchy, where the currencies of peripheral emerging economies have a lower liquidity premium than the currencies of advanced economies. Under these conditions, we argue that domestic economic policy coordination should lay a major focus on a low policy rate and, especially, a competitive exchange rate for obtaining, at least, a balanced current account, in order to prevent boom-bust-cycles in capital flows with subsequent financial crises and their damaging effects on employment and growth. We conclude that it is a rather ambitious and long term goal to climb up the currency hierarchy, especially under the current conditions of financial globalization.