International monetary arrangements for the 21st century PDF
Preview International monetary arrangements for the 21st century
Barry Eichengreen International Monetary Arrangements for the 21st Century THE BROOKINGS INSTITUTION Washington, D.C. ii Copyright © 1994 THE BROOKINGS INSTITUTION 1775 Massachusetts Avenue, N. W., Washington, D.C. 20036 All rights reserved Library of Congress Cataloging-in-Publication data: Barry Eichengreen International monetary arrangements for the 21st century/Barry Eichengreen p. cm. (Integrating national economies) Includes bibliographical references and index. ISBN 0-8157-2276-1 (cloth) ISBN 0-8157-2275-3 (paper) 1. Foreign exchange Government policy. 2. Monetary policy. 3. International finance. I. Title. II. Series. HG3851.E33 1994 332.4'5dc20 94-23163 CI P 9 8 7 6 5 4 3 2 1 The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences Permanence of Paper for Printed Library Materials, ANSI Z39.48-1984 Typeset in Plantin Composition by Princeton Editorial Associates Princeton, New Jersey Printed by R. R. Donnelley and Sons Co. Harrisonburg, Virginia iii THE BROOKINGS INSTITUTION The Brookings Institution is an independent organization devoted to nonpartisan research, education, and publication in economics, government, foreign policy, and the social sciences generally. Its principal purposes are to aid in the development of sound public policies and to promote public understanding of issues of national importance. The Institution was founded on December 8, 1927, to merge the activities of the Institute for Government Research, founded in 1916, the Institute of Economics, founded in 1922, and the Robert Brookings Graduate School of Economics and Government, founded in 1924. The Board of Trustees is responsible for the general administration of the Institution, while the immediate direction of the policies, program, and staff is vested in the President, assisted by an advisory committee of the officers and staff. The by-laws of the Institution state: "It is the function of the Trustees to make possible the conduct of scientific research, and publication, under the most favorable conditions, and to safeguard the independence of the research staff in the pursuit of their studies and in the publication of the results of such studies. It is not a part of their function to determine, control, or influence the conduct of particular investigations or the conclusions reached." The President bears final responsibility for the decision to publish a manuscript as a Brookings book. In reaching his judgment on the competence, accuracy, and objectivity of each study, the President is advised by the director of the appropriate research program and weighs the views of a panel of expert outside readers who report to him in confidence on the quality of the work. Publication of a work signifies that it is deemed a competent treatment worthy of public consideration but does not imply endorsement of conclusions or recommendations. The Institution maintains its position of neutrality on issues of public policy in order to safeguard the intellectual freedom of the staff. Hence interpretations or conclusions in Brookings publications should be understood to be solely those of the authors and should not be attributed to the Institution, to its trustees, officers, or other staff members, or to the organizations that support its research. iv Board of Trustees James A. Johnson William H. Gray III Bruce K. MacLaury Chairman Vartan Gregorian David O. Maxwell Teresa Heinz Constance Berry Newman Leonard Abramson Samuel Hellman Maconda Brown O'Connor Ronald J. Arnault Warren Hellman Samuel Pisar Rex J. Bates Thomas W. Jones David Rockefeller, Jr. A. W. Clausen Vernon E. Jordan, Jr. Michael P. Schulhof John L. Clendenin James A. Joseph Robert H. Smith D. Ronald Daniel Breene M. Kerr John D. Zeglis Walter Y. Elisha Thomas G. Labrecque Ezra K. Zilkha Stephen Friedman Donald F. McHenry Honorary Trustees Elizabeth E. Bailey Robert D. Haas J. Woodward Redmond Vincent M. Barnett, Jr. Andrew Heiskell Charles W. Robinson Barton M. Biggs Roger W. Heyns James D. Robinson III Louis W. Cabot Roy M. Huffington Howard D. Samuel Edward W. Carter Nannerl O. Keohane B. Francis Saul II Frank T. Cary James T. Lynn Ralph S. Saul William T. Coleman, Jr. William McC. Martin, Jr. Henry B. Schacht Kenneth W. Dam Robert S. McNamara Robert Brookings Smith Bruce B. Dayton Mary Patterson McPherson Morris Tanenbaum Douglas Dillon Arjay Miller John C. Whitehead Charles W. Duncan, Jr. Donald S. Perkins James D. Wolfensohn Robert F. Erburu v Foreword The 1990s have been turbulent times for the international monetary system. In 1992 a series of speculative crises battered the Exchange Rate Mechanism of the European Monetary System (EMS), forcing Italy and the United Kingdom to withdraw. The Scandinavian countries were forced to abandon the exchange rate pegs that they had established over the course of previous years. In 1993 the crisis spread to other European currencies, forcing Europe to relinquish the narrow bands of the EMS for a much more permissive system. In the summer of 1994, the U.S. dollar depreciated sharply against the Japanese yen, deepening policymakers' dissatisfaction with floating exchange rates among the major currencies. Coming as they did, on the eve of the fiftieth anniversary of the Bretton Woods Agreement, these events did much to rekindle the debate over the future of the international monetary system. In this book, Barry Eichengreen analyzes international monetary options for the twenty-first century. He argues that it will not be possible for governments to prevent exchange rate movements from exceeding prespecified limits. If this conclusion is correct, it rules out the sustainability of pegged but adjustable exchange rates, crawling pegs, and other regimes in which governments preannounce limits for exchange rate fluctuations. Countries that have traditionally pegged their currencies will be forced to choose between floating exchange rates and monetary unification. Barry Eichengreen is John L. Simpson Professor of Economics and Professor of Political Science at the University of California at Berkeley. He gratefully acknowledges the assistance of Brian A'Hearn and Lisa Ortiz in researching this manuscript, and Pamela Fox's help in processing it. Portions of the study were undertaken during visits to the Institute for Advanced Study in Berlin, the Institute for International Economic Studies in Stockholm, and the International Monetary Fund. Helpful comments were provided by Michael Bordo, Ralph Bryant, Benjamin Cohen, Max Corden, Andrew Crockett, Jeff Frankel, Jeff Frieden, Hans Genberg, Alberto Giovannini, Lars Jonung, Peter Kenen, Jacques Melitz, Maury Obstfeld, Lars Svensson, and John Williamson. The author is especially indebted to Maury Obstfeld, on whose theoretical work the manuscript draws, and to Charles Wyplosz for several years of collaboration on these issues. At Brookings Laura Kelly and Kathleen McDill verified the manuscript. Princeton Editorial Associates edited it and prepared the index. Funding for the project came from the Center for Global Partnership of the Japan Foundation, the Curry Foundation, the Ford Foundation, the Korea Foundation, and the Tokyo Club Foundation for Global Studies, the United States-Japan Foundation, and the Alex vi C. Walker Educational and Charitable Foundation. The author and Brookings are grateful for their support. The views expressed in this book are those of the author and should not be ascribed to the persons or organizations whose assistance is acknowledged or to the trustees, officers, or staff members of the Brookings Institution. BRUCE K. MAC LAURY President September 1994 Washington, D.C. vii In truth, the free movement of capital is incompatible with a system of exchange rates that are occasionally changed by consequential amounts and in a predictable direction…These various considerations lead me to conclude that we will need a system of credibly fixed exchange rates … if we are to preserve an open trading and financial system. Exchange rates can be most credibly fixed if they are eliminated altogether, that is, if international transactions take place with a single currency. Richard Cooper viii Contents Tables ........................................................................................................................................ 11 Figures ..................................................................................................................................... 12 PREFACE .................................................................................................................................. 1 1. Introduction ......................................................................................................................... 12 The Debate over International Monetary Reform ........................................................... 13 The Argument ................................................................................................................... 15 Organization of This Book ................................................................................................ 17 2. Policy Options ...................................................................................................................... 19 Ordering à la Carte ...........................................................................................................20 Complete Meals (Systemic Options) ................................................................................30 Summary .......................................................................................................................... 33 3. Prerequisites for International Monetary Stability ............................................................. 35 Capacity to Effect Relative Price Adjustments ................................................................. 35 Compatibility with the Adherence to Robust Monetary Rules ........................................ 37 Capacity to Contain Market Pressures ............................................................................ 40 Summary .......................................................................................................................... 43 4. Evidence from the Historical Record ................................................................................... 45 The Classical Gold Standard ............................................................................................ 45 Interwar Arrangements .................................................................................................... 50 Post-World War II Arrangements .................................................................................... 52 Summary ......................................................................................................................... 60 5. The Challenge of Deep Integration ...................................................................................... 61 Mounting Market Pressures ............................................................................................. 61 Implications for International Monetary Arrangements ................................................. 65 Implications for Two Proposals for International Monetary Reform .............................. 72 What Options Remain? .................................................................................................... 76 6. The Optimum Currency Dilemma ....................................................................................... 77 The Economics of Optimum Currency Areas ................................................................... 77 The Politics of Optimum Currency Areas......................................................................... 84 Summary ..........................................................................................................................89 7. European Prospects ............................................................................................................ 90 A Case Study of the Infeasibility of Exchange Rate Targets............................................ 90 Prospects for European Monetary Unification ................................................................ 94 8. Options for the Rest of the World ...................................................................................... 104 Optimum Currency Considerations ............................................................................... 105 Options for Non-EU Europe .......................................................................................... 110 9 The Former Soviet Union ................................................................................................ 112 Africa ............................................................................................................................... 115 The Western Hemisphere ............................................................................................... 117 Asia .................................................................................................................................. 119 9. Conclusion .......................................................................................................................... 121 References .............................................................................................................................. 133 10
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