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The Fallacy of the Revised Bretton Woods Hypothesis: Why TodayÕs International Financial System Is Unsustainable

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  • Thomas I. Palley

Abstract

The stability of the international financial system is in doubt. Analysis of the system has focused mainly on the sustainability of financing the U.S. trade deficit and has failed to understand the microeconomics of transactions within the system. According to this brief by Thomas I. Palley, the international financial system is unsustainable for reasons of demand, not supply. He recommends a global system of managed exchange rates to replace the current system before it crashes, along with the U.S. economy. East Asian economies are pursuing export-led growth and running huge trade surpluses with the United States by actively pursuing policies aimed at maintaining undervalued exchange rates. Their governments continue to accumulate U.S. financial assets in order to support and stabilize the international financial system.While East Asian policymakers are correct in their belief that they can improve economic outcomes through exchange rate intervention, the system is undermining the structure of income and aggregate demand and eroding U.S. manufacturing capacity.

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Paper provided by Levy Economics Institute in its series Economics Public Policy Brief Archive with number ppb_85.

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Date of creation: Jun 2006
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Handle: RePEc:lev:levppb:ppb_85

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  1. C. Fred Bergsten & Olivier Davanne & Pierre Jacquet, 1999. "The Case for Joint Management of Exchange Rate Flexibility," Working Paper Series, Peterson Institute for International Economics wp99-9, Peterson Institute for International Economics.
  2. Morris Goldstein & Nicholas R. Lardy, 2005. "China's Role in the Revived Bretton Woods System: A Case of Mistaken Identity," Working Paper Series, Peterson Institute for International Economics WP05-2, Peterson Institute for International Economics.
  3. Thomas I. Palley, 2005. "External Contradictions of the Chinese Development Model: Export-led Growth and the Dangers of Global Economic Contraction," Working Papers, Political Economy Research Institute, University of Massachusetts at Amherst wp101, Political Economy Research Institute, University of Massachusetts at Amherst.
  4. Williamson, John, 1998. "Crawling Bands or Monitoring Bands: How to Manage Exchange Rates in a World of Capital Mobility," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 1(1), pages 59-79, October.
  5. Michael Dooley & David Folkerts-Landau & Peter Garber, 2005. "Direct investment, rising real wages and the absorption of excess labor in the periphery," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Feb.
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Cited by:
  1. Gustav A. Horn & Katharina Dröge & Simon Sturn & Till van Treeck & Rudolf Zwiener, 2009. "Von der Finanzkrise zur Weltwirtschaftskrise (III)," IMK Report, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute 41-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Piffaretti, Nadia F., 2009. "Reshaping the international monetary architecture : lessons from Keynes'plan," Policy Research Working Paper Series 5034, The World Bank.

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