Abstract

Experience with Flexible Exchange Rates

The collapse of the monetary system created in Bretton Woods and the transition to floating a good decade ago made all important currencies subject to the rules governing flexible exchange rates. In view of the marked short-term fluctuations of exchange rates and their use to justify demands for a new Bretton Woods, there are grounds for comparing experience with fixed and flexible exchange rates. In a world increasingly dominated by uncontrolled inflation, the unpegging of the DM exchange rate in 1973 created an essential condition precedent that enabled the Bundesbank to gain acceptance of a stability-oriented monetary policy with prospects of success. A high degree of monetary autonomy was achieved. The experience gained in the European monetary system cannot be adduced as evidence of the functional efficiency of a fixed exchange rate system on a world scale. In the EMS, capital outflows quickly compel the affected countries to take action, in contrast to the USA, who remain unaffected on the whole by such outflows, whether under fixed or flexible exchange rates. With respect to current account adjustments, in the early years of floating the respective reactions failed to come up to expectations. For the first decade of floating as a whole, however, it can be said that in the large, but not in the small industrial countries current-account equilibria were less marked and less enduring than in the ten years prior to transition to flexible exchange rates. At most, interventions by the central banks on the foreign exchange markets influence a currencys exchange rate only briefly. It is apparent from the intervention policy of the Bundesbank that it is prepared to intervene in the market whenever it appears advisable. It does not expect to exert any decisive influence on exchange rates, but proceeds from the assumption that its preparedness to intervene at any time willtend to have a calming effect on market activities. All in all, it would seem that the preconditions for fixed exchange rates by no means prevail on a worldwide basis. Stable exchange rates presuppose a stability-oriented economic policy to which the members of IMF committed themselves in the revised IMF agreement of 1978. Stricter supervision of economic policy by IMF is intended to achieve closer adherence to that commitment.