Edited by Koichi Hamada, Beate Reszat and Ulrich Volz
Richard N. Cooper There is a vague but palpable dissatisfaction with existing international monetary arrangements. These entail few formal rules with regard to how countries should manage their exchange rates, and little coherent guidance from the economics profession beyond an apparent consensus that floating a country’s currency is better than fixing it—albeit with many reservations about free floating for any but the largest of economies. Against this intellectual background, Europeans defied many academic reservations and in 1999 created a common currency among 11, later 16, members of the European Union. The resulting euro has now had a decade of experience, without obviously disastrous results. There have been some strains, particularly, as was predicted and feared, regarding Italy, but also a respectable record of achievement in terms of continued growth with modest inflation. At the same time, there have been large and disturbing movements in exchange rates among the major currencies. During the past two decades the yen has ranged from 85 yen to the dollar in 1995 to 148 in 2005, a range of 75 percent, while during the decade of its existence the euro has ranged by over 90 percent, between USD 0.83 and USD 1.60 per euro. Throughout the period, inflation was relatively low in all three regions. What justification is there for such wide swings among major currencies? What are the implications for international trade and especially for investment in tradable goods? And what are the implications for decisions regarding exchange rate policy for other countries,...