flavianopolis

As usual Stefan Karlsson refuses to publish comments where he is refuted. This time we have been discussing exchange rates and I have been arguing that all countries can devalue their exchange rates at the same time and by the same nominal amount, whereas he argues that they cannot.

At first glance Mr. Karlsson's argument seems to make sense. Suppose that all countries of the world were united in a monetary union similiar to that of the the euro-zone. I am thinking of a situation where all the countries of this planet would use one single paper currency and that this currency would have no formal link to gold. Would it really be possible for such a global monetary union to devalue its exchange rate? If there are no other currencies than that issued by the global central bank is there really anything to devalue in relation to?

Actually there is.

The global central bank could undertake interventions in the gold market in order to attempt to raise the relative price of gold, which would have precisely the same effect as if a country with a national paper currency would successfully do the same. The only noteworthy difference would be that the devaluation on behalf of a global central bank would affect net importers and net exporters of gold in different manners.

However: If the Swedish central bank were to undertake interventions in the gold market in an attempt to bring about a higher relative price of gold and the operation were successful, that would affect regions within Sweden with and without gold mining industry in different manners. So strictly speaking there is no difference at all between a devaluation on behalf of global monetary union and on behalf of a national central bank.

Please note that I am not discussing whether it is wise to devalue.