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.
