Dornbusch e Frankel - The Flexible Exchange Rate System

Dornbusch e Frankel - The Flexible Exchange Rate System -...

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NBER WORKING PAPER SERIES THE FLEXIBLE EXCHANGE RATE SYSTEM: EXPERIENCE AND ALTERNATIVES Rudiger Dornbusch Jeffrey Frankel Working Paper No. 2464 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 1987 This paper was written for a conference on "Survival and Growth in a Polycentric World Economy,' Basle, Switzerland, October 14-17, 1987. It is forthcoming in a book of the International Economic Association (Macmillan: London). The authors would like to thank Charles Engel, Kenneth Froot, Charles Goodhart and Alan MacArthur for comments on an earlier draft. The second author would like to acknowledge support under an Alfred P. Sloan Research Fellowship. The research reported here is part of the NBER's research program in International Studies. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research.
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NBER Working Paper #2464 December 1987 The Flexible Exchange Rate System: Experience and Alternatives ABSTRACT We review ten aspects of how floating exchange rates have worked in practice, contrasted with ten characteristics that the system was supposed to have in theory. We conclude that the foreign exchange market is characterized by high transactions-volume, short-term horizons, and an absence of stabilizing speculation. As a result, the exchange rate at times strays from the equilibrium level dictated by fundamentals, contrary to theory. We then look at ten proposed alternatives to the current system. Four entail decentralized policy rules: new classical macroeconomics, a gold standard, monetarism, and nominal income targetting. Four foresee enhanced international coordination: G—7 "objective indicators,' Williamson target zones, McKinnon uworid monetarism," and a "Hosomi Fund." Two propose enhanced independence: a "Tobin tax" on transactions, and a dual exchange rate. We conclude that one might build a case for intervention from the observed failure of international financial markets to behave as in the theoretical ideal, but that government intervention in practice is just as likely to fall short of the theoretical ideal. Rudiger Dornbusch Jeffrey Frankel Department of Economics Department of Economics Massachusetts Institute of University of California Technology Berkeley, CA 94720 Cambridge, MA 02139 (415) 642-8084 (617) 253-3648
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2 The experience with exchange rates over the last fifteen years has in many ways differed from what was anticipated in 1 973 when the major industrialized countries abandoned the effort to keep the values of their currencies fixed. There is a widespread feeling that exchange rates have turned out to be more volatile than they were expected to be, than they should be, and perhaps than they need be. Many practitioners believe that exchange rates are driven by psychological factors and other irrelevant market dynamics, rather than by economic fundamentals. Support has grown in the 1 980s for some sort of government action to stabilize currencies, perhaps a reform of the world monetary
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Dornbusch e Frankel - The Flexible Exchange Rate System -...

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