Exchange Rate Volatility
Thomas D. Willett
There is great controversy over how well floating exchange rates have been working. Although widespread floating has not brought the extreme disasters that some critics feared, there have been many episodes of considerable exchange rate volatility. Global economic performance over the period of floating has been quite poor, with high rates of inflation and unemployment and low rates of economic growth compared with the previous position of the postwar period. Some argue that the instability of floating rates has been a significant cause of this poor economic performance, whereas others argue that, on the contrary, the instability of exchange rates is primarily a symptom of the instability of the underlying economic and financial fundamentals. Adherents of both schools of thought favor the establishment of more stable underlying conditions. There is, however, a chicken-and-egg problem. The critics of floating tend to argue that a great deal of official exchange-rate management is necessary to create more stable conditions, whereas those who view floating most favorably tend to argue that the major focus should be placed directly on domestic monetary and fiscal policies and that official intervention in the foreign-exchange markets can play a minor role at best in fostering greater global economic stability.
Which of these views is correct? Does the truth lie somewhere between them? One of the principal objectives of this conference is to assess the current state of technical knowledge about the causes and effects of fluctuations in the exchange rate and to discuss implications for national and international policies and needs and strategies for further research. The purpose of this paper is to open a discussion of
Helpful comments on an earlier draft of this paper by Randall Hinshaw, Leon Hollerman, Richard Sweeney, Edward Tower, Paul Wonnacott, and members of the workshop on international and monetary economics at Claremont Graduate School are gratefully acknowledged. The research underlying this paper is being supported in part by a grant from the General Electric Foundation.