Sep
09

Currency Conundrum

mine Emerging market economies that export substantial raw materials face difficult choices. If they reduce interest rates, their currencies fall, inflation rises, capital quickly leaves and living standards decline. If they raise rates to protect their currency, investment and manufacturing will plummet and drive their economies into recession. The middle road, raise rates a bit and impose capital controls (like China) but only briefly, to reduce capital flight and currency depreciation.

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