Post Keynesian versus Neoclassical Explanations of Exchange Rate Movements: A Short Look at the Long Run

1Though they would be suspicious of claims that any other approach could do them better. 1 Although Post Keynesian exchange rate theory has developed in a number of fruitful directions over the past few decades, there has thus far been no attempt to offer a view of the long run. No parallel with, for example, the Neoclassicals ’ Purchasing Power Parity or the Monetary Model has been offered. The primary reason for this has been the Post Keynesian belief that capital flows are the prime drivers of currency prices, and that these are best understood over the course of days, weeks, and months. The long run is simply an aggregation of short runs, and adopting a different approach may cause us to overlook the forces that are truly moving foreign exchange prices (e.g., technical trading rules, expectation formation, and agent psychology). Nevertheless, I think there are compelling reasons to take at least a short look at the long run. First and foremost, there are policy issues that are more properly addressed over a longer calendar period. Post Keynesian theory, at least on the surface of it, has little to offer the policy maker concerned with potential foreign exchange fluctuations over the course of the next few