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G-3 Exchange-Rate Relationships: A Review of the Record
and of Proposals for Change
Richard H. Clarida Essays in International Economics No. 219
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| This essay reviews exchange-rate relations among the Group of Three (G-3) countries since the collapse of Bretton Woods and analyzes recent proposals for changing the way in which the G-3 conducts exchange-rate policy. The essay seeks to understand these proposals within the context of the existing monetary policies and intervention arrangements that are likely to be pursued by the G-3 central banks in the absence of any formal governmental arrangements to limit exchange-rate volatility. The advocates of the proposals for change have assessed the global costs of exchange-rate volatility and (their estimates) of exchange-rate misalignments, especially as these apply to the emerging economies through their links to the global capital markets. They conclude that the status quo is unacceptable and that a sustained effort to limit G-3 exchange-rate fluctuations would deliver benefits to the world economy that would outweigh the value of any concurrent loss of monetary autonomy for the G-3. The skeptics make a positive (not a normative) judgment that these kinds of proposals will not get around the “impossible trinity” of international finance. |
