Recent Exchange Rate Experience and Proposals for Reform

The paper reviews the grounds for fears that foreign exchange markets are not behaving as well as they should: recent misalignments and cries, and seven sets of academic findings. (1) Exchange rate volatility is high, (2) with possible adverse effects. (3) Volatility cannot be explained by observable fundamentals, (4) and changes when the regime changes, even without a change in volatility of fundamentals. (5) Expectations appear to be biased. (6) Short-term expectations are destabilizing. And (7) the effect of changes in monetary policy on the exchange rate is drawn out over time, and is not instantaneous. The paper then reviews proposals for radical reform. Some entail "irrevocably fixed" exchange rates, some capital controls, and some formal institutions for intervention in the foreign exchange market. The conclusion is that the present system, floating, managed with occasional intervention, for all its flaws, is probably better than the alternatives.


Issue Date:
1996-01
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/233422
Total Pages:
21
JEL Codes:
F31; F33
Series Statement:
Working Paper
C96-060




 Record created 2017-04-01, last modified 2017-08-29

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