FRANCIS H. SCHOTT*
Fixed versus fluctuating exchange rates is a perfect topic for any economist from one very important point of view--it is a hardy perennial. One can write a term paper, master's thesis, doctoral dissertation, or book on the topic without fear of being out of date. You can also sell yourself as a relevant person to any private or government employer dealing with international affairs by having worked on this topic, a decade ago, now, or most likely a decade from now.
The reason is simple yet profound. We know from Adam Smith and David Ricardo that specialization, including that across borders, enhances productivity and potential world welfare. We also know that the optimum currency area is a single world because the implicit factor mobility and absence of currency risk maximize specialization and productivity.
These theoretical observations clash with a world of nation-states, in which currency autonomy is a key attribute of sovereignty. Thus, a single world currency--no exchange rates--is theoretically best, and fixed exchange rates without currency restrictions second-best, in max-____________________