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Exchange Rate Policy Reconsidered

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  • Richard C. Marston
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    Abstract

    The Bretton Woods Conference of 1944 which fixed exchange rates for over twenty-five years is often cited as a model of economic cooperation among countries. Yet over fifteen years have elapsed since the breakdown of the Bretton Woods System without any serious efforts to restore fixed exchange rates among the currencies of the major industrial countries. This paper considers why governments may have refrained from "reforming" the exchange rate system. The first section of the paper examines the principal problem which exchange rate policy is designed to address, exchange rate variability. The paper distinguishes between the short run volatility of exchange rates, which firms can hedge against in the financial markets, and longer term swings in real exchange rates, which can lead to costly resource reallocation. The paper reviews evidence concerning the effectiveness of exchange market intervention, evidence which suggests that intervention may not be effective unless it is monetized. The paper goes on to analyze arguments concerning fixed exchange rates, and to assess the experience of two fixed rate systems, Bretton Woods and the European Monetary System. Finally, the paper examines the target zone system which has been proposed as an alternative to freely floating and fixed exchange rates.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2310.

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    Date of creation: Jul 1987
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    Publication status: published as International Economic Cooperation, edited by Martin Feldstein, Chicago: The University of Chicago Press, 1988.
    Handle: RePEc:nbr:nberwo:2310

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    1. William H. Branson, 1986. "The Limits of Monetary Coordination As Exchange Rate Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 175-194.
    2. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
    3. Kenen, Peter B, 1987. "Exchange Rate Management: What Role for Intervention?," American Economic Review, American Economic Association, vol. 77(2), pages 194-99, May.
    4. Harry G. Johnson, 1966. "The Welfare Costs of Exchange-Rate Stabilization," Journal of Political Economy, University of Chicago Press, vol. 74, pages 512.
    5. P J Forsyth & J A Kay, 1980. "The economic implications of North Sea Oil Revenues," Fiscal Studies, Institute for Fiscal Studies, vol. 1(3), pages 1-28, July.
    6. John C. Hause, 1966. "The Welfare Costs of Disequilibrium Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 74, pages 333.
    7. Deborah J. Danker & Richard A. Haas, 1985. "Small empirical models of exchange market intervention : applications to Germany, Japan, and Canada," Staff Studies 135, Board of Governors of the Federal Reserve System (U.S.).
    8. Jeffrey A. Frankel & Charles Engel, 1982. "Do Asset-Demand Functions Optimize over the Mean and Variance of Real Returns? A Six-Currency Test," NBER Working Papers 1051, National Bureau of Economic Research, Inc.
    9. Maurice Obstfeld, 1985. "Floating Exchange Rates: Experience and Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 369-464.
    10. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-53, October.
    11. Levich, Richard M., 1985. "Empirical studies of exchange rates: Price behavior, rate determination and market efficiency," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 19, pages 979-1040 Elsevier.
    12. Huang, Roger D, 1981. "The Monetary Approach to Exchange Rate in an Efficient Foreign Exchange Market: Tests Based on Volatility," Journal of Finance, American Finance Association, vol. 36(1), pages 31-41, March.
    13. Branson, William H. & Henderson, Dale W., 1985. "The specification and influence of asset markets," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 15, pages 749-805 Elsevier.
    14. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    15. Shiller, Robert J, 1979. "The Volatility of Long-Term Interest Rates and Expectations Models of the Term Structure," Journal of Political Economy, University of Chicago Press, vol. 87(6), pages 1190-1219, December.
    16. Liviatan, Nissan, 1980. "Anti-Inflationary Monetary Policy and the Capital Import Tax," The Warwick Economics Research Paper Series (TWERPS) 171, University of Warwick, Department of Economics.
    17. Jacob A. Frenkel & Michael L. Mussa, 1980. "Efficiency of Foreign Exchange Markets and Measures of Turbulence," NBER Working Papers 0476, National Bureau of Economic Research, Inc.
    18. Richard C. Marston, 1983. "Stabilization Policies in Open Economies," NBER Working Papers 1117, National Bureau of Economic Research, Inc.
    19. Marston, Richard C., 1985. "Stabilization policies in open economies," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 2, chapter 17, pages 859-916 Elsevier.
    20. Canzoneri, Matthew B., 1982. "Exchange intervention policy in a multiple country world," Journal of International Economics, Elsevier, vol. 13(3-4), pages 267-289, November.
    21. Jeffrey A. Frankel, 1985. "The Dazzling Dollar," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(1), pages 199-217.
    22. Frenkel, Jacob A & Mussa, Michael L, 1980. "The Efficiency of Foreign Exchange Markets and Measures of Turbulence," American Economic Review, American Economic Association, vol. 70(2), pages 374-81, May.
    23. Willem H. Buiter & Marcus Miller, 1983. "Changing the Rules: Economic Consequences of the Thatcher Regime," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 14(2), pages 305-380.
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