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Transition to Flexible Exchange Rates

Published online by Cambridge University Press:  13 June 2011

Louka T. Katseli-Papaefstratiou
Louka T. Katseli-Papaefstratiou
Affiliation:
the School of Organization and Management of Yale University
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Abstract

In the process of reviewing three recent books on international monetary developments, this article focuses on both positive and normative aspects of the “exchange-rate crisis” and its effects on policy formulation in both developed and developing countries. It attributes short-run exchange rate volatility mainly to shifts in expectations and movements in international interest rate differentials; at the same time, it links long-run exchange rate movements to the current account positions of various countries. The article also focuses on the policy implications of such volatility in a world characterized by real as opposed to monetary disturbances and discusses the alternatives open to policy makers in that context. Finally, it critically evaluates the argument that flexible exchange rates among industrialized countries have benefited the less developed countries, and discusses the implications of these developments for their choice of exchange-rate regime.

Type
Review Articles
Information
World Politics , Volume 33 , Issue 2 , January 1981 , pp. 299 - 320
Copyright
Copyright © Trustees of Princeton University 1981

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References

1 International Monetary Fund, International Financial Statistics (Washington, D.C., 1979).Google Scholar The exchange-rate index is calculated from a period average.

2 The MERM index combines the exchange rates between the currency in question and 20 other major currencies with weights derived from the IMF's Multilateral Exchange Rate Model. The U.S. index (solid line in Figures 1 and 2), is the inverse of the U.S. MERM-weighted rate.

3 For an analysis of the use of monetary policy in response to external disturbances, see Dornbusch, Rudiger, “Monetary Policy Under Exchange Rate Flexibility,” mimeo (Cambridge, Mass.: M.I.T., October 1978)Google Scholar; Krugman, Paul, “Purchasing Power Parity and Exchange Rates: Another Look at the Evidence,” Journal of International Economics, VIII (August 1978), 397–407.CrossRefGoogle Scholar

4 Branson, William H. and Rotemberg, Julio J., “International Adjustment with Wage Rigidity,” European Economic Review, XIII (May 1980)Google Scholar; Sachs, Jeffrey, “Wages, Profits and Macroeconomic Adjustment: A Comparative Study,” Brookings Papers on Economic Activity, II (1979), 269–320.CrossRefGoogle Scholar

5 In 1976, 25 out of 101 countries used a composite-peg policy; Thailand has recently joined that group.

6 See esp. Holden, Paul and Suss, E. C., “A Note on the Classification of Exchange Rate Policies,” International Monetary Fund (Washington, D.C., August 1977), DM/77/78.Google Scholar

7 For a more detailed exposition of these considerations, see Branson, William H. and Katseli-Papaefstratiou, Louka T., “Exchange Rate Policy for Developing Countries,” Center Discussion Paper No. 300, Economic Growth Center (Yale University, November 1978)Google Scholar, forthcoming in Grassman, S. and Lundberg, E., eds., The World Economic Order: Past and Prospects (London: Macmillan).CrossRefGoogle Scholar

8 Katseli-Papaefstratiou, , “The Reemergence of the Purchasing Power Parity Doctrine in the 1970's,” Special Paper in International Finance, No. 13, IFS Series (Princeton University, December 1979).Google Scholar

9 Branson, William H. and Katseli-Papaefstratiou, Louka T., “Income Instability, Terms of Trade and the Choice of Exchange Rate Regime,” Journal of Development Economics, VII (March 1980), 49–69.CrossRefGoogle Scholar

10 The increase in the dollar price will be equal to the depreciation only if the country is a price taker in the export market—i.e., if it faces an infinitely elastic demand curve or if the elasticity of the export supply function is zero.

11 Kenen, Peter B., “The Theory of Optimum Currency Areas: An Eclectic View,” in Mundell, Robert A. and Swoboda, Alexander K., eds., Monetary Problems of the International Economy (Chicago: University of Chicago Press, 1969), 54.Google Scholar