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The Flexible Exchange Rate System: Experience and Alternatives

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  • Dornbusch, Rudiger
  • Frankel, Jeffrey

Abstract

We review ten aspects of how floating exchange rates have worked in practice, contrasted with ten characteristics that the system was supposed to have in theory. We conclude that the foreign exchange market is characterized by high transactions-volume, short-term horizons, and an absence of stabilizing speculation. As a result, the exchange rate at times strays from the equilibrium level dictated by fundamentals, contrary to theory. We then look at ten proposed alternatives to the current system. Four entail decentralized policy rules: new classical macroeconomics, a gold standard, monetarism, and nominal income targeting. Four foresee enhanced international coordination: G-7 "objective indicators," Williamson target zones, McKinnon "world monetarism," and a "Hosomi Fund." Two propose enhanced independence: a "Tobin tax" on transactions, and a dual exchange rate. We conclude that one might build a case for intervention from the observed failure of international financial markets to behave as in the theoretical ideal, but that government intervention in practice is just as likely to fall short of the theoretical ideal
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(This abstract was borrowed from another version of this item.)

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  • Dornbusch, Rudiger & Frankel, Jeffrey, 1988. "The Flexible Exchange Rate System: Experience and Alternatives," Department of Economics, Working Paper Series qt5ct1w459, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  • Handle: RePEc:cdl:econwp:qt5ct1w459
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    Cited by:

    1. Dornbusch, Rudiger, 1989. " Real Exchange Rates and Macroeconomics: A Selective Survey," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(2), pages 401-432.
    2. Jacob A. Frenkel & Morris Goldstein, 1988. "Exchange rate volatility and misalignment: evaluating some proposals for reform," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 185-231.
    3. Michael Bordo & Anna Schwartz, 1991. "What has foreign exchange market intervention since the Plaza Agreement accomplished?," Open Economies Review, Springer, vol. 2(1), pages 39-64, February.
    4. Shehu Usman Rano Aliyu, 2010. "Exchange rate volatility and export trade in Nigeria: an empirical investigation," Applied Financial Economics, Taylor & Francis Journals, vol. 20(13), pages 1071-1084.
    5. Gruen, David W R & Wilkinson, Jenny, 1994. "Australia's Real Exchange Rate--Is It Explained by the Terms of Trade or by Real Interest Differentials?," The Economic Record, The Economic Society of Australia, vol. 70(209), pages 204-219, June.
    6. Jeffrey Frankel., 1995. "How Well Do Foreign Exchange Markets Function: Might a Tobin Tax Help?," Center for International and Development Economics Research (CIDER) Working Papers C95-058, University of California at Berkeley.
    7. Michele Fratianni & Dominick Salvatore & Paolo Savona, 1998. "Ideas for the Future of the International Monetary System: Conclusions and Remarks," Open Economies Review, Springer, vol. 9(1), pages 689-700, January.
    8. Terry Boulter & Celeste Ping Fern Tan, 2000. "The Short Run Impact of Scheduled Macroeconomic Announcements on the Australian Dollar during 1998," School of Economics and Finance Discussion Papers and Working Papers Series 082, School of Economics and Finance, Queensland University of Technology.
    9. Stein, Jerome L. & Paladino, Giovanna, 1997. "Recent developments in international finance: A guide to research," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1685-1720, December.
    10. Éric Girardin & Velayoudom Marimoutou, 1997. "Les fondamentaux permettent-ils d'améliorer la prévision du taux de change franc-dollar ?," Revue Économique, Programme National Persée, vol. 48(3), pages 661-672.
    11. Alessandra Pelloni, 1993. "Long-run consequences of finite exchange rate bubbles," Open Economies Review, Springer, vol. 4(1), pages 5-26, March.
    12. Salvatore, Dominick, 1995. "The international monetary system: Are present arrangements optimal? Editor's introduction," Journal of Policy Modeling, Elsevier, vol. 17(5), pages 443-448, October.
    13. Andrea Terzi, 2003. "Is a transactions tax an effective means to stabilize the foreign exchange market?," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 56(227), pages 367-385.
    14. Donges, Juergen B., 1987. "Trade protectionism and international monetary order: Recalling the relevance of past experience," Kiel Working Papers 304, Kiel Institute for the World Economy (IfW).
    15. Dodig, Nina & Herr, Hansjörg, 2015. "Theories of finance and financial crisis: Lessons for the Great Recession," IPE Working Papers 48/2015, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    16. Augustine C. Arize & Ioannis N. Kallianotis & Scott Liu & John Malindretos & Alex Panayides, 2014. "National Debt and Its Effects on Several Other Variables: An Econometric Study of the United States," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 5(4), pages 98-113, October.
    17. Rudiger W. Dornbusch, 1988. "The adjustment mechanism: theory and problems," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 32, pages 195-228.
    18. Sergio Da Silva, 2004. "International Finance, Levy Distributions, and the Econophysics of Exchange Rates," International Finance 0405018, EconWPA.
    19. Søren Johansen & Katarina Juselius & Roman Frydman & Michael Goldberg, 2007. "Testing Hypotheses in an I(2) Model with Applications to the Persistent Long Swings in the Dmk/$ Rate," Discussion Papers 07-34, University of Copenhagen. Department of Economics.
    20. Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 446, European Central Bank.
    21. Ashok Parikh & David Bailey & David Lovatt, 1997. "The European Monetary System and various tests of policy convergence," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 6(1), pages 43-62.
    22. Michael D. Bordo & Anna J. Schwartz, 1990. "What has Foreign Market Intervention Since the Plaza Agreement Accomplished?," NBER Working Papers 3562, National Bureau of Economic Research, Inc.
    23. Francis Bismans & Olivier Damette, 2012. "La taxe Tobin : une synthèse des travaux basés sur la théorie des jeux et l’économétrie," Working Papers of BETA 2012-09, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    24. Koedijk, Kees G., 1998. "The pendulum of exchange rate economics," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 1-3, February.

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