Toward a More Orderly Exchange Rate System

Abstract

There is at present a widespread feeling of dissatisfaction with the exchange rate system born out of the 1971–3 crisis, in particular because of the instability that has so far characterized floating exchange rates. This feeling is not new, but it has grown considerably over the past four years with the extreme weakness, then extreme strength, of the US dollar. Partly in reaction against the instability of floating exchange rates, several European countries have created the European Monetary System, and the seven major industrial countries have recently started a joint study of the role of official intervention in foreign exchange markets. In my view, the risk of a shift back towards exchange rate rigidity with all its distorting effects is small, but it is there, and to argue that swings in exchange rates of 30 per cent or more are the healthy manifestation of an efficient market does not help to reduce it. Rather the time has come to assess the causes and effects of floating exchange rates, and to consider possible remedies that would not take us from Charybdis to Scylla.

The views expressed in this paper represent the opinions of the author and should not be interpreted as official Fund views.