Chapter 7: Global imbalances: Origins, Consequences and Possible Resolutions
Takatoshi Ito1 INTRODUCTION The international ﬁnancial system shared by industrialized countries has evolved through many phases in the last two centuries: the silver standard, the gold standard, competitive devaluation, the Bretton Woods system, the managed ﬂoat regime, and the free-ﬂoating exchange rate. Exchange rate behaviour under the free-ﬂoating system from 1973 on was not what its advocates had predicted, nor was it truly free from intervention. The US dollar crisis of 1978 was reversed only through large-scale intervention by the United States and the issuance of foreign currency-denominated bonds (the so-called Carter bonds). The Plaza Agreement and other concerted interventions by the Group of Five in September 1985 helped depreciate the overvalued dollar. The Plaza Agreement was followed by the Louvre Accord of February 1987, which aimed at stabilizing exchange rates among the Group of Seven. The Group of Seven has since continued its eﬀorts to manage exchange rates through policy coordination and communication with the markets whenever the monetary authorities of each country have judged the major exchange rates to be misbehaving. In each international monetary regime, currency crises occurred in one form or another. During the gold standard system, parity with gold was so important that any adjustment tended to result in a political crisis. When the exchange rate is misaligned, overvalued, for example, the economy tends to fall into recession and deﬂation. Under the Bretton Woods system, the adjustment of the ﬁxed exchange rate (to the US dollar) was permitted, but it was...
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