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The case for a world currency

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  • Mundell, Robert

Abstract

The flexible exchange rate experiment has been a failure. The best test of any monetary system is the degree to which it avoids unnecessary changes in real exchange rates. These changes drastically reduce the gains from trade and disqualify the arguments ordinarily made for free trade areas and the customs unions. By this criterion, the worst period in history has been the period since generalized floating that began in 1973. All of the arguments made for flexible exchange rates have proved to be incorrect. Destabilizing capital movements have rocked the exchange rates between areas that have a high and consistent degree of price stability. Exchange rates consistently overshoot equilibrium, causing harmful shifts between traded and non-traded goods industries and in the levels of indebtedness of rich and poor countries. The dollar–euro exchange rate, first dropping by a large percentage and then rising by an even larger percentage over the past 20 years, between areas that have price stability, is sufficient proof that the markets are not working in a direction and degree that is conducive to economic welfare. The solution lies in creating an international currency that can be used by all countries for international trade purposes. A two-step process is envisaged: First, a convergence of the three or four major currency areas on a common unit of account, called the “DEY” for dollar–euro–yen or dollar–euro–yuan, with a joint Monetary Policy Council to determine monetary policy of the area. Countries could start with large margins and gradually reduce them to complete convergence. Second, the Board of Governors of the IMF (or its replacement) designate the DEY as the platform on which, in conjunction possibly with gold, it will build the new world currency, to be called the INTOR. Both the Keynes and White Plans called for a world currency. Political conditions were not ripe for its inclusion in the Articles of Agreement and that is one of the reasons why the great post-war monetary experiment of the fixed-exchange-rate international system broke down.” Since the creation of the euro, the political configuration of the international monetary system has changed and the United States is no longer the unquestioned “dictator”. It is now very much in America's interest, as well as the interests of the EU, Japan and China, to restore a new international monetary system that would be to the economic benefit of all countries.

Suggested Citation

  • Mundell, Robert, 2012. "The case for a world currency," Journal of Policy Modeling, Elsevier, vol. 34(4), pages 568-578.
  • Handle: RePEc:eee:jpolmo:v:34:y:2012:i:4:p:568-578
    DOI: 10.1016/j.jpolmod.2012.05.011
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    Cited by:

    1. Reza Moosavi Mohseni & M. Azali, 2014. "Monetary Integration and Optimum Currency Area in ASEAN+3: What We Need for a New Framework?," International Journal of Economics and Financial Issues, Econjournals, vol. 4(2), pages 277-285.
    2. Richard N. Cooper & Michael Bordo & Harold James, 2006. "What About a World Currency? Proposal for a Common Currency among Rich Democracies. One World Money, Then and Now," Working Papers 44, Bank of Greece.
    3. Pietro Alessandrini & Michele Fratianni, 2007. "Resurrecting Keynes to Revamp the International Monetary System," Working Papers 2007-19, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    4. Kocenda, Evzen & Hanousek, Jan & Engelmann, Dirk, 2008. "Currencies, competition, and clans," Journal of Policy Modeling, Elsevier, vol. 30(6), pages 1115-1132.
    5. Bonpasse, Morrison, 2007. "The Single Global Currency - Common Cents for Business," MPRA Paper 6199, University Library of Munich, Germany.
    6. Sergio Schmukler, 2006. "Comments on R. Cooper, M. Bordo and H. James: Exchange rate arrangements and disarrangements: prospects for a world currency," International Economics and Economic Policy, Springer, vol. 3(3), pages 409-414, December.
    7. Costabile, Lilia, 2009. "Current global imbalances and the Keynes Plan: A Keynesian approach for reforming the international monetary system," Structural Change and Economic Dynamics, Elsevier, vol. 20(2), pages 79-89, June.
    8. Michael Bordo & Harold James, 2006. "One world money, then and now," International Economics and Economic Policy, Springer, vol. 3(3), pages 395-407, December.
    9. Michael D. Bordo & Richard N. Cooper, 2006. "Proposal for a Common Currency among Rich Democracies," Working Papers 127, Oesterreichische Nationalbank (Austrian Central Bank).
    10. Pietro Alessandrini & Michele Fratianni, 2009. "Resurrecting Keynes to Stabilize the International Monetary System," Open Economies Review, Springer, vol. 20(3), pages 339-358, July.
    11. repec:onb:oenbwp:y::i:127:b:1 is not listed on IDEAS
    12. Riccardo Fiorentini & Guido Montani, 2012. "The New Global Political Economy," Books, Edward Elgar Publishing, number 14443.
    13. Liu, Tao, 2015. "Trade finance and international currency," MPRA Paper 64362, University Library of Munich, Germany.
    14. Sheng, Andrew & Kwek, Kian-Teng & Cho, Cho-Wai, 2009. "A tale of Asian exchange rate management: Romance of the three currencies," Journal of Asian Economics, Elsevier, vol. 20(5), pages 519-535, September.
    15. Campos, Nauro F. & Jarko, Fidrmuc & Iikka, Korhonen, 2017. "Business cycle synchronisation in a currency union : Taking stock of the evidence," Research Discussion Papers 28/2017, Bank of Finland.
    16. John Jairo García Rendón, 2007. "La relación euro-dólar: seis años después que el euro presentase su mínimo nivel," REVISTA ECOS DE ECONOMÍA, UNIVERSIDAD EAFIT, February.
    17. Menkhoff, Lukas, 2009. "Internationale Währungsmarktstabilität durch eine Globalwährung?
      [International Monetary Stability via a Global Currency?]
      ," MPRA Paper 18386, University Library of Munich, Germany.
    18. Josef T. Yap, 2008. "Managing Capital Flows : The Case of the Philippines," Development Economics Working Papers 22703, East Asian Bureau of Economic Research.
    19. Kamleshan Pillay & Jorge E. Viñuales, 2016. "“Monetary” rules for a linked system of offset credits," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 16(6), pages 933-951, December.
    20. Heinz Handler, 2008. "From the Bancor to the Euro. And Further on to the Intor?," WIFO Working Papers 317, WIFO.

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