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Dynamic Games and the Time Inconsistency of Optimal Policy in Open Economies

Listed author(s):
  • Miller, Marcus
  • Salmon, Mark

It has been argued that the Bretton Woods system (of pegged but adjustable exchange rates) set up after World War II was designed specifically to prevent the manipulation of exchange rates in pursuit of national macroeconomic objectives (see R. Cooper) ; so it is perhaps no coincidence that the ending of pegged rates has led to the re-emergence of theories and policies involving such "manipulation". Before the war, when inflation was low and unemployment high in the major industrialised nations, this involved "competitive depreciation" as countries tried to gain employment ; in the late 1970's and early 1980's, however, countries like the UK and the US have embarked on policies of competitive appreciation in order to cut inflation, regarded as the first priority. Sharp movements in exchange rates, however, constitute a threat to orderly trade and stimulate protectionism, as Bergsten (1981) argues.

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 232.

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Length: 43 pages
Date of creation: 1983
Handle: RePEc:wrk:warwec:232
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