Volume 8, No. 3 (Fall 2005)
The aim of this paper is to criticize the foundation and the relevance of the insulation argument. In what follows, I will attempt to show that: (1) The favor flexible exchange rates enjoy in the literature is in part a result of the confusion between devaluation and free exchange rates; (2) Asymmetric shocks cannot provide a basis for the insulation argument, for their meaning is either a definitional truism or simply absurd; (3) Devaluation cannot offset the impact of foreign trade shifts on the domestic structure of production, and it instead produces additional problems; (4) A policy of monetary nationalism cannot prevent foreign-engineered business cycles from affecting domestic economic conditions, even if this is the only (but neglected) instance when a case for insulation could be rightly made.
