The Reconstruction of International Monetary Arrangements

335 Pages·1987·29.16 MB·English

by  Robert Z. Aliber (eds.)

THE RECONSTRUCTION OF INTERNATIONAL MONETARY
ARRANGEMENTS
Also by Robert Z. Aliber
THE FUTURE OF THE DOLLAR AS AN INTERNATIONAL
CURRENCY
GUIDELINES, INFORMAL CONTROLS, AND THE MARKET
PLACE (co-editor)
THE INTERNATIONAL MARKET FOR FOREIGN EXCHANGE
(editor)
THE INTERNATIONAL MONEY GAME
WORLD INFLATION AND MONETARY REFORM
NATIONAL MONETARY POLICIES AND THE
INTERNATIONAL FINANCIAL SYSTEM (editor)
EXCHANGE RISK AND CORPORATE INTERNATIONAL
FINANCE
THE POLITICAL ECONOMY OF MONETARY REFORM (editor)
YOUR MONEY AND YOUR LIFE
MONEY BANKING AND THE ECONOMY (co-author)
MONETARY REFORM AND WORLD INFLATION
THE RECONSTRUCTION
OF INTERNATIONAL
MONETARY
ARRANGEMENTS
Edited by
Robert Z. Aliber
Palgrave Macmillan
ISBN 978-1-349-18515-3 ISBN 978-1-349-18513-9 (eBook)
DOI 10.1007/978-1-349-18513-9
©Graduate School of Business, University of Chicago, 1987
Softcover reprint of the hardcover 1st edition 1987 978-0-333-39680-3
All rights reserved. For information, write:
Scholarly & Reference Division,
St. Martin's Press, Inc., 175 Fifth Avenue, New York, NY 10010
First published in the United States of America in 1987
ISBN 978-0-312-66590-6
Library of Congress Cataloging-in-Publication Data
The Reconstruction of international monetary arrangements.
Bibliography: p.
l. International finance. l. Aliber, Robert Z.
HG3881.R33 1987 332' .042 86-3758
ISBN 978-0-312-66590-6
Contents
Notes on the Contributors vii
z.
Introduction by RoBERT ALIBER I
PART I THE RECENT PAST
The Evolving International Monetary System: Past Plans
and Optimality 7
Herbert G. Grube/
2 Unexpected Real Consequences of Floating Exchange
Rates 21
Rachel McCulloch
3 Toward a More Orderly Exchange Rate System 46
Jacques R. Artus
4 The Wage and Price Adjustment Process in Six Large
OECD Countries 70
Robert J. Gordon
5 Fixed Exchange Rates, Flexible Exchange Rates, or the
Middle of the Road: a Re-examination of the Arguments
in View of Recent Experience 92
Hans Genberg and Alexander K. Swoboda
PART II INTERNATIONAL RESERVES AND
INTERNATIONAL MONEY
6 Internationally Managed Money Supply 117
George M. von Furstenberg
7 Changing Perceptions of International Money and
International Reserves in the World Economy 127
K. Alec Chrystal
8 Gold: Does it Provide a Viable Basis for the Monetary
System? 151
Richard N. Cooper
v
vi Contents
9 Gold in the International Monetary System: a Catalog of
the Options 168
Robert Z. Aliber
I 0 Gold Monetization and Gold Discipline 183
Robert P. Flood and Peter M. Garber
II Gold in the Optimal Portfolio 212
David A. Hsieh and John Huizinga
12 An Analysis of the Management of the Currency
Composition of Reserve Assets and External Liabilities
of Developing Countries 262
Michael P. Dooley
13 The Theory of the Lender of Last Resort and the
Eurocurrency Markets 281
Jeffrey R. Shafer
14 The Endogeneity of International Liquidity 305
Peter M. Oppenheimer
Index 324
Notes on the Contributors
Robert Z. Aliber is Professor of International Economics and Finance
at the University of Chicago.
Jacques R. Artus is on the staff of the International Monetary Fund.
K. Alec Chrystal is Professor of Economics at the University of
Sheffield.
Richard N. Cooper is Maurits Boas Professor of Economics at Harvard
University.
Michael P. Dooley is on the staff of the International Monetary Fund.
Robert P. Flood is Professor of Economics at Northwestern University.
Peter M. Garber is Professor of Economics at Brown University.
Robert J. Gordon is Professor of Economics at Northwestern
University.
Herbert G. Grubel is Professor of Economics at Simon Fraser
University.
Hans Genberg is Professor of Economics at the Graduate Institute of
International Affairs, Geneva.
David A. Hsieh is an Associate Professor of Economics at the University
of Chicago.
John Huizinga is an Associate Professor of Economics at the University
of Chicago.
Rachel McCullough is Professor of Economics at Northwestern
University.
Peter M. Oppenheimer is Reader in Economics, Christ Church, Oxford.
Jeffrey R. Shafer is with the Division of Monetary and Fiscal Affairs,
the Organization for Economic Cooperation and Development.
Alexander K. Swoboda is Professor of Economics at the Graduate
Institute of International Affairs, Geneva.
Georges M. von Furstenberg is the Rudy Professor of Economics,
Indiana University.
vii
Introduction: The
Reconstruction of
International Monetary
Arrangements
ROBERT Z. ALIBER
The agenda at conferences on policy issues in international finance tend
to reflect the concern with the adequacy of existing monetary arrange
ments. In July 1972, at the conclusion of the first Wingspread
Conference on International Monetary Problems, one participant noted
that the Bretton Woods system of pegged exchange rates was breaking
down and was beyond repair. Several other participants agreed; one
suggested that the only alternative was a system of floating exchange
rates. Although the Bretton Woods system of pegged exchange rates had
been patched in the context of the Smithsonian Agreement at the end of
1971 and the US dollar had been devalued by more than 10 per cent
relative to the currencies of the other major industrial countries, the
US balance of payments deficit remained extremely large. The British
authorities had ceased supporting the pound at its Smithsonian parity
several weeks before the Conference.
By the time of the second Wingspread Conference in July 1974, the
international economic environment had changed sharply. The cur
rencies of the major industrial countries had been floating for more than
a year, and the US dollar had depreciated sharply. The market price of
gold was more than four times higher than two years before. The world
price of oil had increased from $2.75 a barrel to $12.50 a barrel as a result
of supply constraints adopted by Saudi Arabia and other members of
the Organization of Petroleum Exporting Countries (OPEC) at the end
of 1973. There was widespread concern whether many countries would
be able to obtain the foreign exchange to finance their imports of oil. The
I
2 Introduction
United States and other industrial economies were experiencing a more
rapid rate of inflation than at any previous time in the post-war period;
the term 'double-digit inflation' had become part of the vocabulary.
The amplitude of the movement of exchange rates during the first
year's experience with the new system was large. Nevertheless, most
analysts accepted the view that the adjustments of most countries'
payments positions to the sharp increase both in the price of oil and in
the foreign exchange cost of oil imports would be easier with floating
exchange rates than with parities.
After the move to floating rates, the United States eliminated many of
the controls and restrictions on international payments that had been
adopted in the 1960s to reduce the payments deficits associated with an
increasingly overvalued dollar. Some analysts believed that the move
ments in exchange rates might be less abrupt as participants in the
foreign exchange market gained more experience with the new system. A
few skeptics, in contrast, believed that floating rates would be unlikely to
work satisfactorily, and that large swings in exchange rates would lead
to increased demands for protection in those countries whose currencies
were becoming increasingly overvalued.
After nearly a decade, however, the sharpness and amplitude of the
exchange rate movements has not led to the conclusion that the system
of floating exchange rates has been operating effectively. In the late
1970s, the foreign exchange value of the US dollar was extremely low
and the dollar was significantly undervalued. Foreign tourists trooped
to the United States because of the substantial bargains. Some foreign
central banks were reducing the proportion of dollar-denominated
assets in their holdings of reserve assets and acquiring reserve assets
denominated in some other currency. Considerable support was given to
the proposal for a Reserve Substitution Account, which would be
attached to the International Money Fund and acquire part or all of the
excess dollar holdings from foreign central banks. By the early 1980s,
however, the US dollar appeared strong and substantially overvalued.
The price of the dollar in terms of the German mark and the Japanese
yen had increased by nearly 50 per cent even though the price levels in
both countries were rising less rapidly than the US price level. The
international competitive position of US firms declined sharply; the US
trade balance went from a surplus of $2 billion in 1975 to a deficit of
$43 billion in 1982. As the dollar became increasingly overvalued, the
demands for protection in the United States increased; monetary issues
had important trade consequences.
The movements on the foreign exchange value of the US dollar were