Prerequisites for International Monetary Stability
WHAT is meant by a successful exchange rate policy or a satisfactory international monetary system? In addressing this question it is important to avoid the tendency to contrast the perceived shortcomings of the prevailing regime with an idealization of the alternatives. In an era of floating, there is a tendency to associate a smoothly functioning international monetary regime with exchange rate stability. And when exchange rates are fixed, there is an analogous tendency to contrast the shortcomings of the existing system with an idealization of the alternative, in this case models of smoothly adjusting floating rates.
These tendencies reflect a simple verity: fixed and flexible exchange rates both have advantages. Fixed rates minimize the disruptions caused by exchange rate volatility and check the more erratic tendencies of policymakers. Flexible rates provide scope for policy initiatives to insulate the economy from disturbances. Successful exchange rate arrangements traditionally are those that have succeeded in combining the advantages of both.
International monetary arrangements with these features all share three characteristics: an ability to effect relative price adjustments, compatibility with the pursuit of robust monetary policies, and capacity to contain market pressures.1 A system with the capacity to effect relative price adjustments is able to accommodate disturbances. Either the exchange rate itself provides this capacity or substitutes exist for this function of exchange rate changes. A system with this charac____________________
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Publication information: Book title: International Monetary Arrangements for the 21st Century. Contributors: Barry Eichengreen - Author. Publisher: Brookings Institutuion. Place of publication: Washington, DC. Publication year: 1994. Page number: 29.
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