International Finance and Financial Policy

By Hans R. Stoll | Go to book overview

12
Question and Answer Session I

Edwin Dale: A question to Scott Pardee: If, as you say, very interestingly, that the markets have now discovered that the central banks can win and will win, why is that so when it was the inability of the central banks to win that led to the breakdown of Bretton Woods?

Scott Pardee: The central banks lost in 1971 because the governments made decisions to go the wrong way. That's the full end of it. We are now in floating rates, and under floating rates it's a freer field for the central banks.

Robert Roosa: And just as a footnote, the ruling doctrine when we had the fixed rate system was that every participant must accept the discipline of the balance of payments.

John Makin: Going back to the question of how the central banks can win, how do you define winning? I bring to mind a comment I heard from a high official of the Bank of Japan. I believe it was in March of 1987 that the dollar would never penetrate 150. Obviously, he lost, but maybe he won by being flexible. Is it not possible that central banks are now a good deal more flexible about their targets and therefore don't try to enter a losing game?

Paul McCracken: We have situations now when there is a decision between the U.S. Treasury and the German officials that this is the time there should be joint intervention along with the other European central banks. More recently it seems there has been a decision between the U.S. authorities and the Japanese authorities that there would be joint intervention. When there is joint intervention, it is very hard to beat the central banks. And this is what people are beginning to learn because they keep burning their fingers in betting against the central banks. Now, we get in a situation where we get to 140 in the dollar-

-127-

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