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The Future of the International Monetary System

The Future of the International Monetary System

Edited by Marc Uzan

Is the international financial architecture debate over? Not according to leading experts gathered together in this impressive volume who try to identify the key trends that will fashion the international financial system in the years ahead. As history has shown, the evolution of the international monetary system is a slow process. However, the authors argue that we may be entering a new era in which a combination of factors will have lasting consequences on the functioning of the international monetary system and the future role of the IMF.

Chapter 11: Exchange rate system for 'mature' economies in a global economy

Lord Skidelsky

Subjects: economics and finance, international economics, money and banking


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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