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Bretton Woods II and the Emerging Economies: Lazarus, Phoenix, or Humpty Dumpty?

  • Arslan Razmi

    ()

    (University of Massachusetts Amherst)

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    Several studies have commented on the emergence of a new interna- tional monetary system in the post-Asian crisis years. The current inter- national financial crisis has, however, put the so-called Bretton Woods II under considerable strain. This paper analyzes the sustainability of the pre-Lehman Brothers international monetary system from an emerging country perspective. A simple framework in which agents have a choice between financial and real assets is constructed in order to explore possi- ble consequences of some of the shocks that emerging economies are cur- rently experiencing. Stock and flow implications are analyzed. Assuming that recent events would have reinforced monetary authorities' desire to maintain an adequate cushion of reserves while preventing exchange rate volatility, we find that the response to most shocks would involve running continuous current account surpluses, that is, a continuation of a crucial aspect of Bretton Woods II. Given political and economic constraints, is such a continuation feasible? A preliminary exploration raises serious doubts and skims alternatives. JEL Categories: F02, F32, F36,

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    File URL: http://www.umass.edu/economics/publications/2009-02.pdf
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    Paper provided by University of Massachusetts Amherst, Department of Economics in its series UMASS Amherst Economics Working Papers with number 2009-02.

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    Date of creation: Mar 2009
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    Handle: RePEc:ums:papers:2009-02
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    1. Michael P. Dooley & David Folkerts-Landau & Peter Garber, 2003. "An Essay on the Revived Bretton Woods System," NBER Working Papers 9971, National Bureau of Economic Research, Inc.
    2. John D. Burger & Francis E. Warnock, 2006. "Local Currency Bond Markets," IMF Staff Papers, Palgrave Macmillan, vol. 53(si), pages 7.
    3. Dornbusch, Rudiger, 1975. "A portfolio balance model of the open economy," Journal of Monetary Economics, Elsevier, vol. 1(1), pages 3-20, January.
    4. Aizenman, Joshua & LEE, JAEWOO, 2005. "International Reserves: Precautionary versus Mercantilist Views, Theory and Evidence," Santa Cruz Department of Economics, Working Paper Series qt44g3n2j8, Department of Economics, UC Santa Cruz.
    5. Jeffrey A. Frankel & Shang-Jin Wei, 2008. "Estimation of De Facto Exchange Rate Regimes: Synthesis of the Techniques for Inferring Flexibility and Basket Weights," NBER Working Papers 14016, National Bureau of Economic Research, Inc.
    6. Barry J. Eichengreen & Jeffrey Sachs, 1984. "Exchange Rates and Economic Recovery in the 1930s," NBER Working Papers 1498, National Bureau of Economic Research, Inc.
    7. Aizenman, Joshua & Marion, Nancy, 2003. "The high demand for international reserves in the Far East: What is going on?," Journal of the Japanese and International Economies, Elsevier, vol. 17(3), pages 370-400, September.
    8. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2008. "Financial Stability, the Trilemma, and International Reserves," NBER Working Papers 14217, National Bureau of Economic Research, Inc.
    9. Ceyhun Bora Durdu & Enrique G. Mendoza & Marco E. Terrones, 2007. "Precautionary Demand for Foreign Assets in Sudden Stop Economies: An Assessment of the New Merchantilism," NBER Working Papers 13123, National Bureau of Economic Research, Inc.
    10. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    11. Joshua Aizenman & Menzie D. Chinn & Hiro Ito, 2008. "Assessing the Emerging Global Financial Architecture: Measuring the Trilemma's Configurations over Time," NBER Working Papers 14533, National Bureau of Economic Research, Inc.
    12. Maurice Obstfeld & Jay C. Shambaugh & Alan M. Taylor, 2009. "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," NBER Working Papers 14826, National Bureau of Economic Research, Inc.
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