I’ve been subscribing to Austrian economics for some time now but I’m still confused about some economic commentary I see in the news. One reason for that is Austrian economics do not often use words such as Balance of Payments or foreign reserves in common academic parlance.
How do central banks artificially overvalue their currency?
How do they appreciate their currency? If they always print money then wouldn’t the value of money continually fall?
How does monetary policy lower the cost of imports, of food for example, when production costs are going up?
What exactly do central banks do with their foreign exchange reserves in doing all the things stated above?
Some of what is written above is probably redundant and confused, I apologize for that
I’m not enrolled in the Academy, but might I offer my answers nonetheless? I’m sure they have errors, but practice makes for improvement.
[1] A central bank would artificially ‘over-value’ its currency by either contracting the supply of its money relative to production, or, and I think this the more likely case, to increase their supply of money relative to the national production at a rate lower than other central banks.
[2] There are two ways for fiat currency to increase (appreciate) in value. The first is that the rate of production increases at a rate greater than the production of fiat currency. If memory serves correctly there was an episode shortly after the Fed was created where the value of the dollar increased despite there being an increase in the supply of dollars, because the number of goods available to be bought increased even greater. This is unlikely however and it is all the more likely the fiat currency currency be appreciated by a central bank inflating their money supply relative less than other nations.
[3] Monetary policy doesn’t lower the cost of imports per se, a better phrasing would be to say that monetary policy can be used to subsidize imports for people A at people B’s expense. This is why imports from China in the near past have been cheap. Inflation of the money supply by the PRC has made it so producers in China loss less money by selling their goods out broad in exchange for (relatively) strong currency such as the USD. Absent of central bank manipulation these cheap imports/subsidies from China and other countries would cease to exist, with their real costs presenting themselves.