DOCSLIB.ORG

FLOATING EXCHANGE RATES and WORLD INFLATION the Effect Of

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
FLOATING EXCHANGE RATES and WORLD INFLATION the Effect Of FLOATING EXCHANGE RATES AND WORLD INFLATION The effect of flexible exchange rates on world inflation is among the most controversial current issues in the study of the international monetary system. This issue raises profound questions about the degree to which domestic inflationary propensities and their transmission across coun­ tries are conditioned by the nature of the exchange-rate regime. These questions themselves concern more fundamental problems of exchange­ rate determination, of price formation in open economies, and the degree of monetary independence and its implications for macro­ economic stabilisation. This book provides the reader with a provocative economic perspective on contemporary international monetary arrangements and their influence on the generation and transmission of inflation in the world economy. Professor Ahmad's analysis represents Vte first attempt to move beyond narrow orthodoxies, and to provide a comprehensive and systematic treatment of the complex interaction between markets for goods, for labour, for interest-bearing assets, and for foreign exchange in determining the behaviour of the price level. The book brings together in one volume the interpretation of diverse and often competing theories, as well as of major empirical insights. While some technical material is unavoidable in a work of this kind, the major part of the text is kept as readable as possible. Floating Exchange Rates and World Inflation deserves to be read by everyone interested in exploring the relationship between international monetary arrange­ ments and world inflation. Jaleel Ahmad is Professor of International Economics at Concordia University in Montreal. He is also the author of Import Substitution, Trade and Development (1978) and of numerous papers in professional journals and edited volumes. He has served as consultant to various international agencies in the field of foreign trade, finance and development. FLOATING EXCHANGE RATES AND WORLD INFLATION laleel Ahmad Professor of Economics Concordia University, Montreal M MACMILLAN © laleel Ahmad 1984 Softcover reprint of the hardcover 1st edition 1984 All rights reserved. No part of this publication may be reproduced or transmitted, in any form or by any means, without permission. First published 1984 by THE MACMILLAN PRESS LTD London and Basingstoke Companies and representatives throughout the world ISBN 978-1-349-17476-8 ISBN 978-1-349-17474-4 (eBook) DOI 10.1007/978-1-349-17474-4 Contents Preface IX 1 INTRODUCTION 1 Complexity of the Analysis 7 Plan of Study 9 2 RECENT INNOVATIONS IN THE THEORY OF INFLATION 11 The Phillips Curve 12 Demand Pull, Cost Push and the Quantity Theory 13 The Natural Rate of Unemployment 15 Rational Expectations 19 Autonomous Cost Push 21 Concluding Observations 24 3 THEORETICAL APPROACHES TO WORLD INFLATION IN FIXED EXCHANGE-RATE REGIMES 28 International Quantity Theory 28 A Simple Monetary Model 30 A Critique of the Monetarist Approach to World Inflation 35 Keynesian and Phillips Curve Approaches 38 An Illustrative Keynesian-Phillips Curve Model 39 Convergence of National Inflation Rates 40 The Scandinavian Model of Inflation 42 International Transmission of Disturbances 47 Transmission of Inflation Under Fixed Exchange Rates 48 Import and Export of Inflation 52 Conclusion 53 vi Contents 4 THEORETICAL APPROACHES TO WORLD INFLATION IN FLOATING EXCHANGE RATE REGIMES 56 Price Insulation Under Flexible Exchange Rates 57 Monetary Independence 61 International Transmission with Capital Mobility 63 Asset Markets and Flexible Exchange Rates 65 A Model of Short-run Exchange-Rate Determination 66 Overshooting of the Exchange Rate 69 Exchange Rates and Inflation in the Short Run 71 Exchange-Rate Expectations and World Inflation 73 Wage and Price Behaviour in the Short Run 76 Wage-Push and Indexation 80 The Long and the Short Run 82 Synchronisation of Economic Activity and Price Levels 88 Empirical Evidence on Inflationary Transmission 90 Conclusion 93 5 WORLD INFLATION, WORLD MONEY SUPPLY AND MONETARY CONTROL 100 Measurement of World Inflation 100 Measurement of World Money Supply 102 Empirical Studies of World Inflation and World Money Supply 104 International Reserves and World Price Level 107 Reserves, Money Supply and World Inflation during the Period of Managed Floating 110 Monetary Control and Inflation 114 Monetary Targets in OECD Countries 116 Problems of Monetary Control 119 Monetary Targets v. Exchange-Rate Targets 122 Monetary Targets and Recession 123 Microeconomic Effects of Monetary Control 125 Concluding Observations 126 6 THE RESERVE DISCIPLINE 131 Inflation-Unemployment Trade-off Under Fixed Exchange Rates 133 The Trade-off Under Floating Exchange-Rate Regimes 134 Empirical Evidence 135 Long-run Trade-off and Rational Expectations 137 Contents vii Political Costs of Devaluation 140 Concluding Comments 141 7 THE VICIOUS CIRCLE OF INFLATION AND DEPRECIATION 143 Phases of the Vicious Circle 144 Wage-Price Spiral 146 A Keynesian Interpretation 148 Components of the Vicious Circle and their Empirical Verification 151 Depreciation and the Price of Traded Goods 151 Traded Goods' Prices and Domestic Inflation 152 Empirical Test of the Vicious Circle Hypothesis 154 Vicious Circle and the Role of Policy 156 Breaking the Vicious Circle 160 8 ASYMMETRIES IN PRICE RESPONSES AND RATCHET EFFECTS 163 Mundell-Laffer Proposition 164 A Monetary Interpretation of the Ratchet 165 The Law of One Price and Other Assumptions of the Ratchet Hypothesis 167 Downward Price Inflexibility 171 Further Asymmetries and Ratchets 172 9 EXCHANGE RISKS, TRANSACTION COSTS AND WORLD INFLATION 174 Risks of Exchange-Rate Flexibility 175 Price Risk 176 Transaction Costs 177 Effects on the Price Level 181 10 INTERNATIONAL LIQUIDITY AND WORLD INFLATION 183 International Liquidity and the Price Level 184 Growth of International Liquidity 185 Eurocurrency Markets and International Liquidity 187 Liquidity Creation in the Eurocurrency Market 189 Inflationary Impact of Eurocurrencies 191 Demand and Supply of Liquidity under Floating Exchange Ra~ l~ viii Contents Demand Orientation of International Liquidity under Floating Exchange-Rate Regime 196 Quantity Theory Once Again 197 Concluding Observations 199 11 EXCHANGE RATES AND WORLD INFLATION: OVERALL CONCLUSIONS 202 Generation v. Transmission of Inflation 202 Exchange-Rate Flexibility and Price Insulation 205 Floating Exchange Rates and Wage-Price Spirals 208 Monetary Growth and World Inflation 210 Incomes Policies? 212 Ratchet Effects 213 Short-run Effects of Exchange-Rate Changes 213 Final Comments 214 References 218 Author Index 244 Subject Index 249 Preface This book grew out of an attempt to answer the question: Are floating exchange rates inflationary? This question raises a number of other questions which are not easily answered. The emergence of strong inflationary pressures throughout the industrial world in a period which roughly coincided with the beginning of managed floating has aroused a widespread suspicion about the possible inflationary propensity of floating exchange rates. Despite their theoretical superiority in bottling up national inflation rates, floating exchange rates in the current regime appear to have done little to prevent inflationary impulses from spreading around through subtle and as yet unclear channels. Other ways in which floating exchange rates are seen to have lent an inflationary bias to the world economy include possibly a loss of discipline in allowing permissive monetary and fiscal policies, assorted price asymmetries in appreciating and depreciating currencies, ratchet effects, vicious circles between depreciation and inflation, and rapid increases in international liquidity. None of these views, of course, flourishes unchallenged. Inflation under floating exchange rates appears to be the most controversial current issue in this area. Previous approaches to the study of inflationary phenomena under flexible exchange rates have been generally narrower, focusing on particular theoretical viewpoints (e.g. monetarist, neo-Keynesian). As a result, theoretical and empirical analyses of the subject have tended to exist in mutual isolation from one another. The focus in this book is much broader. Here an attempt is made to analyse the full complexity of floating exchange rates in their interaction with the market for goods, for labour, and for assets. This is done without the confining disability of any particular narrow theoretical label. My primary purpose is to examine the cluster of doctrines and empirical propositions concerning the alleged inflationary propensities of floating exchange rates since 1973--4. Any attempt to analyse the effect of exchange-rate variations on the world price level is bound to involve the wider issues of price-level behaviour in open economies, ix x Preface exchange-rate determination, and the efficacy of monetary and fiscal policies. Not only the scope of the domestic price stabilisation policies but also the channels and the speed by which price and other macroeconomic disturbances propagate themselves internationally can vary greatly with the nature of the exchange-rate regime. The fact that average levels of inflation may rise or fall in future does not detract from the abiding nature of the problem. A portion of my task has been to pull together a number of different strands scattered throughout the voluminous literature on internationat finance and open-economy macroeconomics. Much of the theoretical literature on floating exchange rates is disjointed
Load more

Recommended publications
  • Spending and the Exchange Rate in the Keynesian Model
    CAVE.6607.cp18.p327-352 6/6/06 12:09 PM Page 327 CHAPTER 18 Spending and the Exchange Rate in the Keynesian Model hapter 17 developed the Keynesian model for determining income and the trade balance in an open economy. In this chapter we consider some further applica- Ctions of the same model, including how governments can change spending in pursuit of two of their fondest objectives—income and the trade balance. We begin with the question of how changes in spending are transmitted from one country to another. Throughout, we focus particularly on the role that changes in the exchange rate play in the process. We bring together the analysis of flexible exchange rates from Chapter 16 with the analysis of changes in expenditure from Chapter 17. 18.1 Transmission of Disturbances Section 17.5 showed how income in one country depends on income in the rest of the world, through the trade balance. The effect varies considerably, depending on what is assumed about the exchange rate. This section compares the two exchange rate regimes, fixed and floating, with respect to the international transmission of economic disturbances.This comparison is one of the criteria that a country might use in deciding which of the regimes it prefers. Transmission Under Fixed Exchange Rates Our starting point will be the regime of fixed exchange rates. For simplicity, return to the small-country model of Section 17.1. In other words, ignore any repercussion effects via changes in foreign income. As Equation 17.9 implies, an internal distur- bance, such as a fall in investment demand DI, changes domestic income by DY 1 5 (18.1) DI s 1 m in the small-country model.
    [Show full text]
  • Currency Board and Dollarization
    Currency Board and Dollarization 1 Currency Board Only a few countries, mainly in Europe, had central banks before the twentieth century. Central banking did not became widespread in the Americas until the period between the First and Second World Wars, and did not become widespread in Africa and Asia until after the Second World War. There were certain arrangements of monetary authorities alternative to central banks. Among the other monetary systems that once were widespread were currency boards. After decades of decline, currency boards have enjoyed a revival of interest in the 1990s. 1.1 What Is a Currency Board? The main characteristics of a currency board are as follows. (1) Anchor Currency The domestic currency maintains a fixed exchange rate to an anchor currency (British pound sterling, U.S. dollar, Euro etc.), and the note-issuing is 100% backed by a foreign assets. A currency board is a variant of fixed exchange rate targeting in which the com- mitment to the fixed exchange rate is by design permanent and is particularly strong. A currency board maintains full, unlimited convertibility between its notes and coins and the anchor currency at a fixed rate of exchange. (2) Reserves A currency board’s reserves are equal to 100 percent or slightly more of its notes and coins in circulation, as set by law. As reserves, a currency board holds low-risk, interest-bearing bonds and other assets denominated in the anchor currency. (3) Monetary Policy By design, a currency board has no discretionary power in monetary policy; market forces alone determine the money supply.
    [Show full text]
  • The Euro and Exchange Rate Stability
    No 1997 – 12 June The Euro and Exchange Rate Stability _____________ Agnès Bénassy-Quéré Benoît Mojon Jean Pisani-Ferry The Euro and Exchange Rate Stability _________________________________________________________________________ TABLE OF CONTENTS RESUME 4 SUMMARY 6 INTRODUCTION 8 1. EUROPEAN MONETARY REGIMES AND DOLLAR EXCHANGE RATE STABILITY : AN ANALYTICAL FRAMEWORK 11 2. EXCHANGE RATE STABILITY UNDER VARIOUS EUROPEAN POLICY REGIMES 16 3. ROBUSTNESS 24 4. QUANTITATIVE EVALUATIONS 31 CONCLUSIONS 36 APPENDIX 1 : MODEL EQUATIONS 38 APPENDIX 2 : LONG TERM SOLUTION OF THE MODEL 42 REFERENCES 43 LIST OF WORKING PAPERS RELEASED BY CEPII 45 3 CEPII, document de travail n° 97-12 RÉSUMÉ La création de l’euro sera un événement sans précédent dans l’histoire du système monétaire international. En effet, jamais un groupe de pays de l’importance des membres de l’Union Européenne ne s’est doté d’une seule et même monnaie. Quel sera l’impact de l’euro sur la stabilité des changes ? En particulier, une fois la transition vers l’Union Monétaire achevée, l’euro sera-t-il plus ou moins stable qu’un panier des monnaies européennes nationales ? La formation de l’Union Monétaire Européenne va en effet modifier les déterminants de la volatilité des changes. Selon un premier argument, on risque de voir s’opérer un transfert de volatilité. Après la fixation des parités entre monnaie Européenne, l’instabilité des changes intra-européens se verrait transmise au taux de change de l’euro vis-à-vis des monnaies non-européennes. Selon un second argument, l’UEM constituera une grande économie, dont le degré d’ouverture sera très inférieur à celui de chaque pays membre.
    [Show full text]
  • The History of the Bank of Russia's Exchange Rate Policy
    The history of the Bank of Russia’s exchange rate policy Central Bank of the Russian Federation Abstract During the post-Soviet period of 1992–98, the monetary policy of the Bank of Russia was essentially exchange rate-oriented due to overall economic and financial instability combined with hyperinflation (1992–94) and high inflation (1995–98). An exchange rate corridor system was introduced in 1995. The government debt crisis of 1998 triggered a shift to a managed floating exchange rate. After that crisis, exchange rate dynamics were largely market-driven. The exchange rate continued to be tightly managed through 2002–05. In 2004, less restrictive capital control regulations were adopted, marking a move from an authorization-based system to flow controls. The rouble experienced steady upward pressure and the Bank of Russia intervened repeatedly in the foreign exchange market to contain the rouble’s appreciation. In 2005, the Bank of Russia introduced a dual-currency basket as the operational indicator for it exchange rate policy, again to smooth the volatility of the rouble’s exchange rate vis-à-vis other major currencies. Following the global financial crisis, the Bank of Russia changed its policy focus towards moderating the rouble’s depreciation. Interest rates were steadily raised, and a range of control measures was implemented. During 2009–12, the Bank of Russia further increased the flexibility of its exchange rate policy. Intervention volumes have steadily decreased. The overall scale of the exchange rate pass-through in the Russian economy has diminished in recent years. Greater flexibility on exchange rates has also let the Bank of Russia put increased emphasis on its interest rate policy.
    [Show full text]
  • Floating Exchange Rates and the Need for Surveillance
    ESSAYS IN INTERNATIONAL FINANCE No. 127, May 1978 FLOATING EXCHANGE RATES AND THE NEED FOR SURVEILLANCE JACQUES R. ARTUS AND ANDREW D. CROCKETT INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS PRINCETON UNIVERSITY Princeton, New Jersey This is the one hundred and twenty-seventh number in the series ESSAYS IN INTERNATIONAL FINANCE, published from time to time by the International Finance Section of the Department of Economics of Princeton University. The authors, Jacques R. Artus and Andrew D. Crockett, are both on the staff of the International Monetary Fund. Artus, who is Chief of the External Adjustment Division of the Fund, which he joined as economist in 1969, has pub- lished widely on economic and financial matters. Crockett, a member of the staff of the Bank of England from 1966 to 1972, when he joined the Fund,is presently Advisor, Middle East Department. He is the author of Money: Theory, Policy, and Institutions and International Money: Issues and Analysis. The Section sponsors the Essays in this series but takes no further responsibility for the opinions expressed in them. The writers are free to develop their topics as they wish. PETER B. KENEN, Director International Finance Section ESSAYS IN INTERNATIONAL FINANCE No. 127, May 1978 FLOATING EXCHANGE RATES AND THE NEED FOR SURVEILLANCE JACQUES R. ARTUS AND ANDREW D. CROCKETT INTERNATIONAL FINANCE SECTION DEPARTMENT OF ECONOMICS PRINCETON UNIVERSITY Princeton, New Jersey Copyright © 1978, by International Finance Section Department of Economics, Princeton University Library of Congress Cataloging in Publication Data Artus, Jacques R Floating exchange rates and the need for surveillance. (Essays in international finance; no.
    [Show full text]
  • The Reform of the Renminbi Exchange Rate Regime
    II THE MACRO- FINANCIAL ENVIRONMENT Box 4 THE REFORM OF THE RENMINBI EXCHANGE RATE REGIME Against a background of large and growing global financial imbalances and concerns about the associated risks for global financial stability, international pressure mounted on the Chinese authorities to adopt a more flexible exchange rate regime in order to help curb growing global current account imbalances and to alleviate upward pressure on more flexible international currencies. Many analysts also expected that any revaluation of the Chinese currency would trigger greater exchange rate flexibility in other Asian countries. On 21 July 2005, the renminbi was revalued by 2% against the US dollar, from 8.2765 to 8.11, and the Chinese authorities announced that they had moved to a “managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies”. However, since the reforms, the renminbi has continued to be tightly managed against the US dollar, so that little impact on the scale of global imbalances can be expected in the short term. The Peoples Bank of China (PBC) has emphasised that managing the exchange rate “with reference to” a basket of currencies does not mean that the renminbi will be pegged to a basket of currencies. The objective of the new regime is to keep the renminbi exchange rate basically stable at an adaptive equilibrium level. While the weights of the currencies in the reference basket were not disclosed, the currencies were selected mainly on the basis of the relative shares of China’s trading partners in goods and services.
    [Show full text]
  • 17. the Reform of China's Exchange Rate Regime
    17. The reform of China’s exchange rate regime Yongding Yu China has had an inflexible exchange rate regime for many decades. According to the International Monetary Fund (IMF), until 2015, China had a crawling-peg–like arrangement for its exchange rate regime. On 11 August 2015, the People’s Bank of China (PBC) took a decisive step towards floating the renminbi (RMB) exchange rate. However, due to a misjudging of market sentiment at the time and bad luck, the reform experiment caused market panic and the renminbi quickly devalued. As a result, the PBC halted the experiment and introduced a new central parity rate– settling mechanism. According to the new rule, the RMB exchange rate with the US dollar was determined by the arithmetical average of the previous day’s closing price and the current day’s theoretical value of the renminbi’s bilateral exchange rate against the dollar that can maintain the stability of the index of a given currency basket over the past 24 hours This author has great reservations about this arrangement, which is intended to achieve both exchange rate stability and minimisation of the use of foreign exchange reserves. This is essentially mission impossible. In fact, only when devaluation pressure on the renminbi coincides with the falling dollar index can the RMB exchange rate move according to the rule, without the need to use a large volume of foreign exchange reserves. The RMB exchange rate has started to stabilise since 2017. In the author’s view, this stabilisation was a result of the combined affects of international and domestic factors, and cannot be attributed to the success of the new central parity price– setting rule—never mind that exchange rate stability should not be a policy objective of the PBC.
    [Show full text]
  • The Renminbi Exchange Rate Revaluation: Theory, Practice and Lessons from Japan
    The Renminbi Exchange Rate Revaluation: Theory, Practice and Lessons from Japan Toshiki Kanamori （金森俊树） Zhijun Zhao （赵志君） March, 2006 Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki Chiyoda-ku, Tokyo 100-6008 Japan www.adbi.org ADBI Policy Paper No. 9 [email protected] © 2006 Asian Development Bank Institute. Knowledge Management Unit 3/06 ISBN: 4-89974-010-7 The views expressed herein do not necessarily reflect the views or position of the ADB Institute, its Advisory Council, Board of Directors, or the governments they represent. The ADB Institute does not guarantee the accuracy of the data included and accepts no responsibility for any consequences arising from its use. The word “country” or other geographical names do not imply any judgment by the ADB Institute as to the legal or other status of any entity, including its borders. About the authors Toshiki Kanamori is Director, Administration, Management and Coordination of the Asian Development Bank Institute (ADBI). He graduated from Hitotsubashi University as well as from New Asia and Yale Center of Chinese University of Hong Kong. During his government career he served with Japan’s Ministry of Finance, Ministry of Foreign Affairs, and Ministry of International Trade and Industry. He was an Alternate Director at ADB HQ from 1990 to 1993. Before joining the ADBI, he was a Visiting Fellow at the China Business Centre (CBC), Hong Kong Polytechnic University. He has published many articles on the PRC economy as well as on global socio-economic issues. Zhijun Zhao is professor and senior researcher of the Institute of Economics, Chinese Academy of Social Sciences (CASS).
    [Show full text]
  • Exchange Rate Regimes, Capital Flows and Crisis Prevention
    NBER WORKING PAPER SERIES EXCHANGE RATE REGIMES, CAPITAL FLOWS AND CRISIS PREVENTION Sebastian Edwards Working Paper 8529 http://www.nber.org/papers/w8529 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2001 This is a revised version of a paper prepared for the National Bureau of Economic Research Conference on “Economic and Financial Crises in Emerging Market Economies,” held in Woodstock, October 19-21, 2000. I have benefited from conversations with Ed Leamer. I thank Marty Feldstein for comments. The views expressed herein are those of the author and not necessarily those of the National Bureau of Economic Research. © 2001 by Sebastian Edwards. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Exchange Rate Regimes, Capital Flows and Crisis Prevention Sebastian Edwards NBER Working Paper No. 8529 October 2001 JEL No. F1, F2, F3, F31, F33 ABSTRACT In this paper I analyze, within the context of the new “financial architecture,” the relationship between exchange rate regimes, capital flows and currency crises in emerging economies. The paper draws on lessons learned during the 1990s, and deals with some of the most important policy controversies that emerged after the Mexican, East Asian, Russian and Brazilian crises. I evaluate some recent proposals for reforming the international financial architecture that have emphasized exchange rate regimes and capital mobility. I discuss emerging markets’ ability to have floating exchange rate regime, and I analyze issues related to “dollarization.” Sebastian Edwards Anderson Graduate School of Business 110 Westwood Plaza UCLA Los Angeles, CA 90095 and NBER [email protected] 1 I.
    [Show full text]
  • Policy Conclusions Chapter Sub-Title Or Article Title
    9 Policy Conclusions Chapter Sub-Title or Article Title CHAPTER AUTHOR But the past is of no importance. Th e present is of no importance. It is with the future that we have to deal. —Oscar Wilde, Th e Soul of Man under Socialism This book examines a number of issues related to exchange rate volatility and the implications of large swings in currency values in a globalized economy. The analysis points to the following conclusions: Floating exchange rates appear to be excessively volatile, but the harm from this volatility is less than the potential harm of moving to fi xed exchange rates. Many economies would benefi t from greater exchange rate fl exibility and few, if any, would benefi t from reduced exchange rate fl exibility. Exchange rate fl exibility has no measurable effect on economic output in the long run, but—when combined with sound monetary policy—fl exible exchange rates help to effectively stabilize infl ation and output. An internationally coordinated strategy to set “reference rates” for verbal and actual foreign exchange intervention might lead to a gradual and modest reduction in excess exchange rate volatility, but such a strategy should not involve the defense of any specifi c levels for exchange rates nor should it detract in any way from the use of monetary policy to stabilize infl ation and output. Volatility of Exchange Rates The standard model of exchange rates does not explain much of the actual behavior of fl oating exchange rates. The two main explanations proposed for this failure are that there is a systematic error in market expectations of the future exchange rate and that there is a factor missing from the standard 231 © Peterson Institute for International Economics | www.piie.com model, commonly called a risk premium.
    [Show full text]
  • Floating Exchange Rates After Ten Years
    JEFFREY R. SHAFER Federal Reserve Bank of New York BONNIE E. LOOPESKO Federal Reserve Bank of New York Floating Exchange Rates after Ten Years TEN YEARS AGO, in March 1973, the United States and other nations abandoned efforts to maintain the Bretton Woods system of fixed exchangerates among the majorcurrencies. The periodof largelymarket- determined(floating) exchange rates between the dollarand other major currenciesbegan. I This fundamentalchange in the internationalmone- tary system was ratified by the RambouilletSummit in 1975 and the Second Amendmentof the InternationalMonetary Fund's Articles of Agreementin 1978. The debate aboutwhether exchange rates among the majorcurrencies oughtto be fixed, freely floating,or somewherein between has continued with considerableintensity. Stronglyheld but sharplycontrasting views on how exchangerates behave andinteract with other economic variables have been central to the debate, but differing interests and values regardingthe properrole of governmentsin financialmarkets have also We gratefullyacknowledge the excellent assistance of Peter Borish and the help of CatherineCrosby with the database. Weare also indebtedto the membersof the Brookings Paneland to MauriceObstfeld and KennethS. Rogofffor insightfuland helpful comments and suggestions.The views expressedhere are those of the authorsand are not the official views of the FederalReserve Bankof New Yorkor the FederalReserve System. 1. The Canadiandollar had been floatingsince May 1970;the pound sterling, since June 1972;and the yen, since February1973. Transitional floats were permittedon several occasions in the lateryears of the BrettonWoods period,but the changein U.S. policy in March1973 marked the end of that period. 1 2 Brookings Papers on Economic Activity, 1:1983 been important.2The strongest advocates of fixed exchange rates, proponentsof the reestablishmentof a gold standard,and the strongest advocates of a free float, the monetarists, tend to share a desire to eliminateany discretionaryelement in economic policy.
    [Show full text]
  • Implications of a US Dollar Depreciation for Asian Developing Countries Emma Xiaoqin Fan
    ERD POLICY BRIEF SERIES Economics and Research Department Number 11 Implications of a US Dollar Depreciation for Asian Developing Countries Emma Xiaoqin Fan Asian Development Bank http://www.adb.org Asian Development Bank P.O. Box 789 0980 Manila Philippines 2002 by Asian Development Bank November 2002 ISSN 1655-5260 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. The ERD Policy Brief Series is based on papers or notes prepared by ADB staff and their resource persons. The series is designed to provide concise nontechnical accounts of policy issues of topical interest to ADB management, Board of Directors, and staff. Though prepared primarily for internal readership within the ADB, the series may be accessed by interested external readers. Feedback is welcome via e-mail ([email protected]). ERD POLICY BRIEF NO. 11 Implications of a US Dollar Depreciation for Asian Developing Countries Emma Xiaoqin Fan November 2002 Emma Fan is an Economist at the Economics and Research Department. The author expresses gratefulness for the comments and suggestions from Ifzal Ali, J.P. Verbiest, Ernesto M. Pernia, Douglas Brooks, Cindy Houser, and Jesus Felipe. he US dollar has appreciated1 considerably since the mid 1990s. TBetween May 1995 and January 2002, the dollar’s nominal effective exchange rate appreciated by 44.5 percent, and the real effective exchange rate2 appreciated 34.0 percent. However, the dollar depreciated between 1 March and 19 July 2002 by 17.4 percent against the euro, and 13.2 percent against the yen.
    [Show full text]