Managed Floats to Damp World-Wide Exchange Rate Liquidity Shocks Like 1982-5, 2006-9: Field and Laboratory Evidence for the Benefits of a Single World Currency

Abstract

This paper's field evidence is: (1) in reality a major exchange rate change devastates an economy, i.e. the widespread academic faith that exchange rate changes are either beneficial or harmless is a false faith that contributes to needless world-wide economic havoc; (2) the 1982-85 exchange rate liquidity crisis sent much of the third world into unmanageable debt levels and was so devastating for the first world that in 1985 the G5 instituted managed cooperating floats; (3) nearly all economists in the official sector and in academe rapidly forgot the devastation and reverted to advocating what caused that devastation, namely a closed economy clean floats exchange rate perspective; and (4) the 2006-2008/9 exchange rate liquidity shock would have been far more drastic but for central bank currency swaps yet the role of these swaps in averting unmanageable exchange rate mayhem that would have precluded the September 2008 rescue of the world financial system, has been ignored. The field evidence thus decisively favours stabilizing managed floats, or better a single world currency, and a means of preventing economists in official sectors and in academe forgetting the devastation and dangers of multiple currencies. This field evidence is bolstered by a laboratory experiment. The experiment incorporates more aspects of real world complexity and more different sorts of official and private sector agents than other investigations and employs a new central bank cooperation-conflict model of exchange rate determination. The experiment allows an interpretation within an umbrella theory of Pope, namely SKAT, the Stages of Knowledge Ahead Theory.