Is There a Case for More Managed Exchange Rates?

The remarkable appreciation of the U.S. dollar after 1980 has been viewed by many observers as a failure of the floating exchange rate system, and has been a major stimulus to calls for a return to a more managed global exchange rate system. Critics of the current international monetary arrangements argue that tighter international "rules of the game" in macroeconomic policymaking would reduce the large swings in exchange rates and in global economic activity that have been experienced since the breakdown of fixed exchange rates in 1973. These critics also suggest that better policy coordination and tighter rules of behavior will be necessary for a smooth adjustment to the immediate problem of a grossly overvalued dollar. Policy recommendations of these critics run across a wide spectrum, ranging from incremental measures such as enhanced consultations among the major economies, and enhanced International Monetary Fund surveillance, to dramatic changes such as a return to fixed exchange rates among the major industrial countries. This paper looks at the case for a return to tighter international rules of behavior for exchange rates among the industrial economies. Does the exchange rate experience since 1973 provide a clear indictment of floating rates, and more importantly, does the experience suggest new ground rules for a more managed system? Are the shortcomings in macroeconomic management in the global economy due to domestic policy mistakes that could be corrected by improved domestic rules of behavior, or are they mistakes involving the international incentives faced by national policymakers, in which case only a reform of the international rules of the game would suf-fice? When economists have analyzed different rules of the game, and especially when they have focused on the choice between fixed and flexible exchange rates, the arguments have centered on two issues. The first issue is how policymakers react to alternative external constraints. For example, do floating rates permit the manipulation of exchange rates by national mone