What is Capital Mobility?
-Capital Mobility Hypothesis-
Capital Mobility Hypothesis refers to “The degree of international capital mobility has controlled or restricted government behavior” i.e. the governments have no control over sudden and massive capital flows.
Governments Can Control this Mobility Through!
1. Unlimited Degree of exchange rate Volatility:
Unlimited Degree of exchange rate refers to how frequently any country is going to change the exchange rate. A country must have such type of exchange rate which must absorb shocks.
Exchange Rate is of two types:
a. Fixed Exchange Rate: A currency is tied to only one currency.
b. Floating Exchange Rate: A currency is tied to basket of currencies.
2. Good Monetary and Fiscal Policies:
“Taylor Made Policies” it is assumed that government’s can control money mobility through good policies.
This -Capital Mobility Hypothesis- can be Overstated or Understated
1. Overstated: When focus is on performance of money from public side i.e. “Demand side” & Supply side is ignored.
2. Understated: Currency has only one function and i.e. Store of Value.
Money has Four Functions:
1) Money is used as a Medium of exchange.
2) Money is used as a Standard of payment.
3) Money is used as a Store of value.
4) Money is used as a numeraire “common account of Measure”.
Cross Border currency competition
==?Basically currency should be territorial phenomena.
==?Each currency’s domain coincides with jurisdiction of state.
==?Each currency should ...