0321316762_IM_19 - Chapter 19 Macroeconomic Policy and...

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Chapter 19 Macroeconomic Policy and Coordination Under Floating Exchange Rates T Chapter Organization The Case For Floating Exchange Rates Monetary Policy Autonomy Symmetry Exchange Rates as Automatic Stabilizers The Case Against Floating Exchange Rates Discipline Destabilizing Speculation and Money Market Disturbances Injury to International Trade and Investment Uncoordinated Economic Policies The Illusion of Greater Autonomy Case Study: Exchange Rate Experience Between the Oil Shocks, 1973–1980 The First Oil Shock and Its Effects, 1973–1975 Revising the IMF’s Charter, 1975–1976 The Weak Dollar, 1976–1979 The Second Oil Shock, 1979–1980 Macroeconomic Interdependence Under a Floating Rate Case Study: Disinflation, Growth, Crisis, and Recession 1980–2001 Disinflation and the 1981–1983 Recession Fiscal Policies, the Current Account, and the Resurgence of Protectionism From the Plaza to the Louvre and Beyond: Trying to Manage Exchange Rates Global Slump Once Again, Recovery, Crisis, and Slowdown
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112 Krugman/Obstfeld • International Economics: Theory and Policy, Seventh Edition What Has Been Learned Since 1973? Monetary Policy Autonomy Symmetry The Exchange Rate as an Automatic Stabilizer Discipline Destabilizing Speculation International Trade and Investment Policy Coordination Are Fixed Exchange Rates Even an Option for Most Countries ? Directions for Reform Summary Appendix: International Policy-Coordination Failures T Chapter Overview The floating exchange rate system in place since 1973 was not, in contrast with the Bretton Woods system, well planned before its inception. Instead, it has developed as an ad hoc system, muddling through the various shocks with which the world economy has had to contend. Disillusion with economic performance since 1973 has often fueled demands for alternative international monetary arrangements. This chapter sets forth the case for and against floating exchange rates and considers the evidence concerning the performance of the international exchange-rate system since 1973. A set of theoretical arguments for and against floating exchange rates frame the discussion of this chapter. Proponents of a floating exchange rate regime cite as its advantages the autonomy it gives to monetary policy, the symmetry of adjustment under floating, and the automatic stabilization which floating rates provide when aggregate-demand shocks occur. Critics fault floating rates on the grounds that they do not impose enough discipline on governments or promote economic policy coordination, because of alleged detrimental effects on international trade and investment, and because floating exchange rates may be susceptible to harmful destabilizing speculation. The DD-AA model first presented in Chapter 16 is used to demonstrate that money-market shocks are less disruptive under a fixed exchange-rate regime than under a floating regime while output-market shocks are less disruptive under a floating exchange rate regime. This result is important in considering the relative attractiveness of floating exchange rates in face of the
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0321316762_IM_19 - Chapter 19 Macroeconomic Policy and...

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