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Exchange Rate Policy Reconsidered

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  • Richard C. Marston

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.

Suggested Citation

  • Richard C. Marston, 1987. "Exchange Rate Policy Reconsidered," NBER Working Papers 2310, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2310
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    1. 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 374-381, May.
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    Cited by:

    1. Rudiger Dornbusch & Jeffrey A. Frankel, 1987. "The Flexible Exchange Rate System: Experience and Alternatives," NBER Working Papers 2464, National Bureau of Economic Research, Inc.

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