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

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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).
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
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 The original Bretton Woods regime was a fixed exchange rate sys- tem in which Western European countries and Japan maintained undervalued exchange rates against the dollar, thereby accumulat- ing large amounts of dollar reserves in the pursuit of export-led growth. The United States was at the center of BWI, playing the
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern