The Political Economy of Austria

The Political Economy of Austria

The Political Economy of Austria

The Political Economy of Austria

Excerpt

The difficulty with fixed exchange rates is that they become obsolete. As time passes and economic conditions change, the equilibrium exchange rate also changes. As the gap between actual and equilibrium rates widens, policy conflicts intensify. The architects of Bretton Woods were fully aware of the problem and believed that they had taken care of it when they provided for periodic parity realignments. In leaving such adjustments to the discretion of governments, however, they overestimated the ability of governments to undertake timely and meaningful parity realignments. Bretton Woods collapsed because countries were not able to coordinate their macroeconomic policies so as to validate existing exchange rates; and when divergent economic developments required parity shifts, countries were unable to respond in a timely and appropriate fashion.

Still, the search continues for an optimal combination of fixed and floating rates. In Austria the schilling is anchored to the deutsche mark by means of an adjustable peg, but floats freely against all other currencies. In this part, the experiences that led to the so-called hard currency policy and the intellectual considerations that provide its foundation are examined in papers by Hans Seidel, by Gottfried Haberler, and by Stephan Koren.

A rigid exchange rate reduces uncertainty and cuts transactions costs. The resultant savings can be substantial for very open economies. Further, if a country tends to be more subject to inflation than its neighbors, fixing currency values is seen as a way of importing price stability. Tying the schilling to the currency of low-inflation Germany is viewed by many Austrians as a means of establishing price discipline at home.

Arguments in favor of fixed exchange rates are frequently accompanied by arguments against floating rates, which are then, often illegitimately, employed as reasons against parity changes in an adjustable-peg system. One of these arguments is reminiscent of the ancient . . .

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