Alternative Approaches to International Surveilance of Exchange- Rate Policies and Discussions

How can we best attempt to ensure that national governments do not abuse the freedom generated by floating-exchange rates by engaging in beggar-thy-neighbor policies to overdepreciate their exchange rates or unduly retard the operation of the international adjustment process by maintaining an overvalued exchange rate? The major purpose of this paper is to develop a basis for choosing among the major alternative approaches which have been proposed for the international surveillance of national exchange-rate policies. The following section attempts to characterize the basic logic of the alternative approacties and isolate the major causes of differences of views among the advocates of alternative approaches. Emphasis is placed on political as well as technical economic considerations. In the third section, I briefly discuss my own views of the evidence on several economic issues which lead me to personally favor the judgmental case-history approach which has been adopted by the International Monetary Fund. The final section emphasizes the importance of strengthening the role of the I.M.F. in the international surveillance process if the judgmental approach is to be effective. The major alternative approaches which have been suggested for the international surveillance of national exchange-rate practices under managed floating can be functionally classified under five categories: 1) reserve indicators 2) target zones 3) reference rates 4) leaning against the wind 5) judgmental assessment or the case-history approach Proposals for allocating current-account positions will be discussed as a variant of the target-zone approach. As a first approximation we can consider the maj or objective of all of these proposals to be to limit the emergence and persistence of disequilibrium or incorrect exchange rates. All of the proposals are concerned with the possibilities of government policies creating such disequilibrium. Some are also concerned with possible deficiencies in private market behavior, for example, due