The Case for Exchange Rate Management

The title of this opening part of the book was chosen with the classic essay of Milton Friedman — written in 1953 and quoted above — in mind. Since the writing of that essay we have witnessed the breakdown of the Bretton Woods system of fixed but adjustable exchange rates and its replacement by a system of floating which was formally legitimised at Jamaica in 1976. While this system has never resembled a pure ‘clean float’ as some advocates would have liked, there is little doubt that the experience to date has shown that it is not the panacea isolating one country’s economic policies from another or eliminating balance of payments concerns as some advocates had presupposed. Along with the experience of floating rates there have been theoretical advances attempting to explain the international policy linkages under floating exchange rates, in particular the phenomenon of overshooting and exchange rate volatility. On the other hand, despite the dissatisfaction with the floating performance there has been no desire to return to a rigid system of fixed parities. It is, therefore, with the benefit of experience1 and theoretical advances that this author argues that there can be and frequently are valid sets of circumstances for the authorities to manage the exchange rate.