3 ms·
Because in an efficient market, if one of the currencies is preferable that will already be reflected in the price. If, based on public information, you would r
by paulgb 9y ago
Because in an efficient market, if one of the currencies is preferable that will already be reflected in the price. If, based on public information, you would rather hold currency X than currency Y, then so would your counterparty in the exchange, so the buying power of currency X would rise accordingly.
Gresham's law applies when a legally fixed exchange rate means that the price can't reflect the difference between the two currencies.
- unknown_apostle 9y agoI'm not going to get dragged into a discussion on "efficient markets". You win by forfeit.
- paulgb 9y agoEfficient markets was just a simplifying assumption to make my point brief, but the second sentence of my explanation does not rely on any more assumptions than Gresham's law does. In any case, I recommend that chapter of Hayek, it's a quick read and you might find it clarifying.