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central banks - The Revived Bretton Woods System Liquidity...

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485 The Revived Bretton Woods System, Liquidity Creation, and Asset Price Bubbles Harris Dellas and George S. Tavlas In this article, we argue that the present constellation of exchange rate arrangements among the major currencies has led to the cre- ation of excessive global liquidity, which has contributed to asset price bubbles. Although the exchange rates of many of the major currencies—including the U.S. dollar, the euro, the yen, and the pound sterling—float against each other, the currencies of many Asian emerging market economies and oil-exporting economies are pegged to the dollar. Dooley, Folkerts-Landau, and Garber (2004a) labeled this system “Bretton Woods II” (BWII). 1 The original Bretton Woods regime (BWI) lasted for about a quarter of a century. Dooley, Folkerts-Landau, and Garber (DFG) argue that the present regime, despite its large global imbalances, will also be sustainable. We have a different view. In what follows, we argue that the orig- inal Bretton Woods system comprised two fundamentally different variants. The first variant lasted from the inception of the system in 1947 until around 1969. The second variant had a much shorter life span, lasting from about 1970 until the collapse of the system in 1973. Cato Journal , Vol. 31, No. 3 (Fall 2011). Copyright © Cato Institute. All rights reserved. Harris Dellas is Professor of Economics at the University of Bern, where he is Director of the Institute of Economics, and a Research Fellow of the Center of Economic Policy Research. George S. Tavlas is Director General of the Bank of Greece and Alternate to the Governor of the Bank of Greece on the European Central Bank’s Governing Council. The views expressed are those of the authors and should not be interpreted as those of their respective institutions. 1 See also Dooley, Folkerts-Landau, and Garber (2003, 2004b, 2005, 2006, 2009).
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486 Cato Journal Whatever may have been the underlying stability characteristics of the initial part of that system, the variant that emerged around 1970 was fundamentally unstable—it was conducive to high global liquid- ity creation and asset price bubbles. We argue further that, to the extent that the global financial system has metamorphosed into a revived Bretton Woods regime, that regime resembles BWI from 1970–73, so that BWII is also prone to high global liquidity creation and asset price bubbles. The remainder of this article is structured as follows. First, we compare both variants of BWI with the BWII regime that emerged in the early 2000s. Next, we discuss the relation between interna- tional liquidity creation under the latter stages of the original Bretton Woods regime and the new Bretton Woods regime. We then pres- ent some concluding observations. Bretton Woods: Old and New
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central banks - The Revived Bretton Woods System Liquidity...

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