The presentation is in five parts. The first part summarizes the normative and the positive objectives of the proponents. The second part centers on the consistency of the several claims advanced by the proponents, and especially on the sources of uncertainty about the prices of currencies and the costs of hedging the uncertainty. The third section reviews the stylized facts about changes in the prices of currencies relative to the long run equilibrium prices and the transmission of shocks to the goods market and to capital market from changes in the cross border flow of money and investment. The fourth section reviews the model of the currency market and the assumptions of the proponents about the source of shocks in the effort to understand why their claims about the advantages of a floating currency arrangement are not consistent with the stylized facts The fifth section reviews the costs and benefits of floating currency arrangement in comparison of a system of parities. One of the observations about a system of parities is the “trinity argument”; one of three features of this system—parities, monetary independence, and free capital movements—is not consistent with the other two. This observation is evaluated in the context of a floating currency arrangement.
74th International Atlantic Economic Conference
October 04 - 07, 2012 | Montréal, Canada
The case for floating currencies revisited
Saturday, October 6, 2012: 9:20 AM
Every international monetary system has a “constitution”, a set of norms and commitments the set forth the rights and obligations of its participants. The “rules of the game” of the gold standard described the patterns of adjustment of price levels and of GDPs to shocks that led to payments imbalances. The flow of gold to finance payments imbalances would lead to an increase in the money supply and in the price level in the country with the payments surplus, and a decrease in the money supply and the price level in the country with the payments deficit. Eventually market forces would ensure that the change in the relationship between national price levels would restore payments balance. The Bretton Woods Treaty set forth the commitments of its member countries, and the constraints on their ability to change the prices of their currencies; a country needed the approval of the International Monetary Fund if it wished to change the parity of its currency by more than ten percent. The constitution of the floating currency arrangement that has prevailed since the early 1970s is more nearly like the “rules of than game” than the Bretton Woods treaty, the adjustment process in response to shocks has been described in a set of articles by Milton Friedman, Gottfried Habeler, Fritz Machlup, Harry Johnson, and other giants of the economics profession that were written in the 1950s and the 1960s. They suggested that market forces would lead to continuous and gradual changes in the prices of currencies that would reflect differences in national inflation rates and changes in productivity in different countries.
Saturday, October 6, 2012: 9:20 AM
Every international monetary system has a “constitution”, a set of norms and commitments the set forth the rights and obligations of its participants. The “rules of the game” of the gold standard described the patterns of adjustment of price levels and of GDPs to shocks that led to payments imbalances. The flow of gold to finance payments imbalances would lead to an increase in the money supply and in the price level in the country with the payments surplus, and a decrease in the money supply and the price level in the country with the payments deficit. Eventually market forces would ensure that the change in the relationship between national price levels would restore payments balance. The Bretton Woods Treaty set forth the commitments of its member countries, and the constraints on their ability to change the prices of their currencies; a country needed the approval of the International Monetary Fund if it wished to change the parity of its currency by more than ten percent. The constitution of the floating currency arrangement that has prevailed since the early 1970s is more nearly like the “rules of than game” than the Bretton Woods treaty, the adjustment process in response to shocks has been described in a set of articles by Milton Friedman, Gottfried Habeler, Fritz Machlup, Harry Johnson, and other giants of the economics profession that were written in the 1950s and the 1960s. They suggested that market forces would lead to continuous and gradual changes in the prices of currencies that would reflect differences in national inflation rates and changes in productivity in different countries.