Chapter 11: Exchange rate system for 'mature' economies in a global economy
11. Exchange rate system for ‘mature’ economies in a global economy Lord Skidelsky INTRODUCTION The main purpose of this chapter is to take issue with Bordo’s claim that targeting inﬂation represents a ‘major technical improvement’ over targeting the exchange rate. It argues that the Bretton Woods system of ﬁxed, but adjustable, exchange rates gave the best all-round performance of all the exchange-rate regimes we have had, and that this constitutes a prima facie case for trying to recreate something like it. It further argues that the causes of the collapse of the ﬁxed exchange rate systems of the last century have been misinterpreted to support the current near consensus in favor of ﬂoating. It claims that the advocates of ‘autonomous’ monetary policy which ﬂoating supposedly makes possible make exaggerated claims on its behalf. Indeed, I believe that the theoretical arguments in favour of ﬂoating would never have achieved wide political acceptance had they not chimed in with US unilateralism. The thrust of the chapter is that a ﬁxed-exchange rate regime is more in tune with global economic integration than is a system of ﬂoating exchange rates, which comes out of the stable of nationalist economics and carries the seeds of currency wars and protectionism. Most contemporary writers on exchange rates subscribe to what Obstfeld and Taylor (1998) have called the ‘open-economy trilemma’. A country cannot simultaneously maintain ﬁxed exchange rates and an open capital market while pursuing a monetary policy oriented toward domestic goals. Speciﬁcally, ﬁxed-exchange rates combined...
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