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What Three Economists Taught Us About Currency Regimes

Summary:
Today, freely floating exchange rates suit most large countries better than the late economists Richard Cooper, Robert Mundell, and John Williamson thought. But some countries do well with firmly fixed exchange rates, while at least half of the world’s countries fall in between. CAMBRIDGE – A generation of great international economists is passing from the scene. Richard Cooper died on December 23, Robert Mundell on April 4, and John Williamson on April 11. Build Back the State Getty/Bettman  Is Stagflation Coming? Z. Wei/Getty Images The Geography of Pandemic

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Today, freely floating exchange rates suit most large countries better than the late economists Richard Cooper, Robert Mundell, and John Williamson thought. But some countries do well with firmly fixed exchange rates, while at least half of the world’s countries fall in between.

CAMBRIDGE – A generation of great international economists is passing from the scene. Richard Cooper died on December 23, Robert Mundell on April 4, and John Williamson on April 11.

All three made important contributions on a variety of topics, and coined memorable terms that remain in use, though not always in their originally intended sense. More specifically, all three played a role in the ongoing debate about optimal currency arrangements. Each was unhappy with the system of market-determined floating exchange rates and proposed reforms. Should central banks fix exchange rates, or even abandon independent currencies entirely, as the members of the eurozone have done? Or should they do something else?

Williamson led the “something else” camp. He advocated intermediate exchange-rate regimes that provide more flexibility than fixed rates but more stability than free-floating rates. One, the “crawling peg,” a term that he coined, proved especially popular in Latin America in the 1980s and early 1990s. Under this arrangement, countries decide to live with inflation by undertaking monthly mini-devaluations that keep their producers price-competitive internationally.

Williamson also championed another intermediate regime, the target zone, under which countries keep their exchange rates within pre-specified bands. He repeatedly updated his proposals to apply the target zone even to the dollar, euro, yen, and other major currencies.

But these arrangements were most popular among emerging markets. Many mixed and matched Williamson’s proposals – falling under the rubric of basket, band, and crawl (BBC) – as Botswana and Singapore still do today.

Williamson was most famous for coining the expression “

Jeffrey Frankel
Jeffrey Frankel, a professor at Harvard University's Kennedy School of Government, previously served as a member of President Bill Clinton’s Council of Economic Advisers. He directs the Program in International Finance and Macroeconomics at the US National Bureau of Economic Research, where he is a member of the Business Cycle Dating Committee, the official US arbiter of recession and recovery.

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