The Debate About the Resilience of the Bretton Woods System: Kindleberger, Nurkse, and Friedman

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The aim of this paper is to analyze empirically the effects of short-term capital flows on exchange rates in Turkey under intermediate and flexible exchange rate regimes. In this framework, the periods where intermediate (January 1994-February 2001) and flexible (March 2001-September 2012) exchange rate regimes implemented in Turkey were taken as a base. The estimation results show that foreign exchange rate regimes are significant factors for the effects of short-term capital flows on exchange rates. While the short-term capital flows have significant effects on exchange rates in the flexible exchange rate regime, they have no significant effects on exchange rates in the intermediate exchange rate regimes. In the intermediate exchange rate regimes, price differentials have significant effects on exchange rates. These empirical results are consistent with the theory.

The aim of this paper is to analyze empirically the validity of the purchasing power parity (PPP) hypothesis for Turkey under intermediate and flexible exchange rate regimes. In this framework, the periods where intermediate (January 1994-February 2001) and flexible (March 2001-September 2012) exchange rate regimes implemented in Turkey were taken as a base. The estimation results show that foreign exchange rate regimes are significant factors in validity of the purchasing power parity in Turkey. While the purchasing power parity is not valid in the intermediate exchange rate regimes, it is valid in the flexible exchange rate regime. This empirical result is also consistent with the theory. Key words: Purchasing power parity, intermediate exchange rate regime, flexible exchange rate regime.

The promotion order between exchange rate marketization and capital account openness is one of the hotspots and debates in the field of international finance. Some scholars support the reform order of internal first, external next”, while others believe that they should be promoted in a coordinated manner. In view of the above two points, some scholars try to use econometric methods such as the Granger causality test and VAR model to determine the promotion order, but these methods are often limited to the selection of samples and depend on the data to a large degree, and different samples may draw different conclusions. Due to the lack of a reference system, the promotion order between exchange rate marketization and capital account openness is not determined. What is the basis or determination? The economic development level, total factor productivity or financial stability? If there is no basis, it is difficult to make a clear judgment on the promotion strategy. If the reference system is abandoned, the investigation only based on the data does not have practical significance. In view of this, this paper refers to the study of Rodriguez（2017）, constructs the influence equation of the exchange rate regime on total factor productivity（with capital account openness as the conversion variable）and the influence equation of capital account openness on total factor productivity（with the exchange rate system as the conversion variable）, respectively. Moreover, total factor productivity is selected as the reference system, and a non-linear modeling technology PSTR model is adopted to investigate the promotion strategy. It is revealed that the exchange rate regime has a significant non-linear effect on total factor productivity, the influence coefficient changes from negative to positive with the increase of capital account openness, which indicates that capital account openness can weaken the negative impact of exchange rate fluctuations on total factor productivity. The influence coefficient of capital account openness on total factor productivity is negative, and it shows obvious stage characteristics with the change of the exchange rate regime. When the exchange rate regime is flexible enough, its negative impact decreases significantly, which indicates that a more flexible exchange rate regime is conducive to absorbing the negative impact of capital account openness. Therefore, with total factor productivity as a reference system, there is a mutual adjustment mechanism between exchange rate marketization and capital account openness. Capital account openness is the premise of exchange rate marketization, and exchange rate marketization is also the prerequisite of capital account openness. They should be promoted in a coordinated way. Compared with the existing results, the possible contributions of this paper are as follows: First, the exchange rate regime and capital account openness are taken as the key explanatory variable and adjustment variable respectively, which enriches the literature with respect to the promotion order of exchange rate marketization and capital account openness, and overcomes the shortcomings of the existing literature that only employ one of them as the key explanatory variable and adjustment variable, making the research more comprehensive and detailed. Second, compared with most existing literature that directly adopt the interactive terms（only the first-order non-linear relations can be identified）, this paper utilizes a non-linear method—the PSTR model, which can identify higher-order non-linear relations and solve the problem of missing implicit non-linear relations. Third, compared with most existing literature focusing on economic growth or financial crisis, this paper conducts the analysis from the perspective of total factor productivity to re-judge the promotion order. The study can provide theoretical support and a decision-making basis for how to promote exchange rate marketization and capital account openness in the constitutive reform and transition from quantitative growth to qualitative development of China’s economic development.

The vigorous debate between proponents of a fixed exchange rate system and proponents of a flexible exchange rate system has not decreased over the past 30 years. New theoretical and empirical research and new reform proposals have continued to fuel the dispute which regime is the best for an individual country and which serves best the task of an international monetary system, which is to provide a stable environment for international trade and investment. The experience with fixed exchange rates under the Bretton Woods system, in which the adjustment process to external imbalances was too slow in many countries and in which the central banks were eventually unable and unwilling to defend the fixed rates, most economists in the late 1960s and the 1970s advocated flexible exchange rates. The decision to let the Bretton Woods system collapse and to implement a flexible exchange rate regime between major international currencies reflected the firm belief in the superiority of flexible exchange rates at the time. However, with the strong rise in the value of the U.S. dollar in the early 1980s and its subsequent decline, doubts arose about the advantages of flexible rates. As a result, the 1980s were characterized by a growing disenchantment with flexible exchange rates, which led to an increasing support for limitations on the flexibility of exchange rates.

This paper examines empirical evidence on monetary policy and inflation performance across exchange rate regimes in Sri Lanka. The criterion used to examine inflation performance is the degree of inflation persistence. Three alternative definitions of inflation persistence are used to model inflation dynamics. First, autocorrelation properties of inflation process are examined. Estimates of traditional Phillips curve and the hybrid-new Keynesian Phillips curve (H-NKPC) suggest a significant upward shift in inflation persistence following the change in exchange rate system in late 1977. Recursive estimates of coefficient on lagged inflation and Chow parameter stability tests confirm these results. Second, inflation response to systematic monetary policy actions is examined. Results suggest that inflation is more persistent and monetary policy is more accommodative in the flexible exchange rate regime. However, the correlation between money growth and inflation is found to be modest. Finally, inflation response to non-systemic policy actions (i.e., policy shocks) is examined through impulse response functions of an unrestricted VAR system. Results suggest that policy shocks are more persistent in the flexible exchange rate regime, than in the fixed exchange rate regime. However, maximum lag length of inflation response to a policy shock is not significantly different across regimes, suggesting that results from the impulse response analysis are inconclusive. Overall, there is substantial evidence to suggest that the shift in inflation persistence coincides with the change in exchange rate regimes. Moreover, during the flexible regime, higher monetary accommodation has resulted in higher inflation persistence. Because of sluggish response of inflation to changes in monetary policy measures, more stringent monetary policy measures may be needed to curb inflationary pressures.(JEL E 31, E 52) Key Words: Inflation Persistence, Monetary Policy, Exchange Rate Regimes DOI: 10.4038/ss.v37i1.1227 Staff Studies Volume 37 Numbers 1& 2 2007 p.69-117

Economists have long debated the relative merits of fixed versus flexible exchange rate systems. One of the major issues in this debate concerns the ability of the exchange rate system to isolate a nation from external disturbances: see for example, papers by Mundell (1960), Stern (1963), Tower and Courtney (1974), and Enders (1977), Fischer , (1977) added another dimension to the controversy by examining the relative stability of real consumption and prices, assuming that the economy is subject to stochastic disturbances. His principle conclusion for the small open economy is that if disturbances are . external, then a flexible exchange rate regime is better in that foreign disturbances have no impact on the domestic economy.

One of the most important economic policy issues, especially in the post-transition countries, is exchange rate regime (ERR), i.e. the question of optimal exchange rate regime that would stimulate economic growth and propagate macroeconomic stability. For small and EU-oriented countries like Bosnia and Herzegovina (B&H), the EU accession processes and character of countries' economic cycle phase are usually highlighted among many factors. The choice of the appropriate exchange rate system is determinated by the specific characteristics of individual countries, time moment and the characteristics of the external shock occurrence. It is generally accepted that monetary instabilities are treated by fixation and real economic shocks by exchange rate fluctuations. An important criterion for assessing the adequacy of the current exchange rate regime is its response to external shocks, such as the Great Recession in 2008. While flexible exchange rate regime is used as an automatic stabilizer, fixed exchange rates place certain restrictions. The process of macroeconomic adjustment in the Baltic States is an example of how large macroeconomic imbalances can be reduced without adjusting the nominal exchange rate and how the currency board can be successfully used as a stage in the euro introduction process. The aim of this paper is to give a comparative overview of the currency board introduction in Bosnia and Herzegovina and the Baltic countries, results achieved and reactions to external shocks (Great Recession in 2008) within this exchange rate arrangement, so conclusions that could be valuable in post-COVID 19 recovery can be drawn. Key words: exchange rates, currency board, external shocks

The present system of flexible exchange rates has not been too successful in sustaining output growth and containing inflation rates in the developed world. This has led many economists and policymakers to float the idea of reviving the Bretton Woods system of international currency management. This has also revived the debate over the relative efficacy of pegged and floating exchange rates in the developing world in promoting employment and growth and in stabilizing output and income fluctuations. The initial success and subsequent crisis in the Euro zone have also reopened the issue of an optimum currency area. This chapter makes a summary comparison between a pegged exchange rate regime, and broadly speaking, a flexible exchange rate regime. However, it is difficult to make a once for all choice in favour of a particular exchange rate regime. Neither the theory nor the country experiences are very conclusive in this regard. Both regimes have their benefits and costs. Suitability of a particular regime, however, depends on the policy target of a country.

In view of the fact that economic theory does not clearly identify which kind of exchange rate regime would be more likely to promote economic growth, this paper seeks to determine the differential impact of exchange rate policy on economic growth in Nigeria under a fixed and a flexible exchange rate regimes from 1973 to 2017 using the dummy variable regression model. The annual time series data of the variables that are used in the estimation of the model are obtained from The World Bank: The World Tables, 1974 and World Bank World Development Indicators. The differential intercept is positive but statistically insignificant and differential slope coefficient is positive and statistically significant, strongly suggesting that the exchange rate-economic growth regressions for the fixed and flexible exchange rate regimes are different. The slope coefficient for a flexible exchange rate regime is greater than the slope coefficient for a fixed exchange rate regime by 7.8472 units. The calculated F-statistic is greater than the tabulated F-statistic at 5 percent level of significance and at 6 and 38 degrees of freedom. This implies that there is an evidence of structural instability. The regression coefficient of exchange rate is positive and statistically significant. The result shows that the switch from a fixed exchange rate regime to a flexible exchange rate regime leads to an increase in exchange rate and the depreciation of exchange rate has significant positive impact on economic growth in Nigeria. A flexible exchange rate regime would promote economic growth more than a fixed exchange rate regime. We recommend the sustainability of a flexible exchange rate regime that has been in operation since 1986 in order to increase economic growth in Nigeria. Keywords: Exchange rate regimes, Economic growth, Dummy variable regression model, Secondary data, Nigeria DOI : 10.7176/JESD/10-18-19 Publication date :September 30 th 2019

In the present day, the international currency system that defines the parameters of the foreign exchange market—a market where national currencies are exchanged and traded—acts as the money-changers of the yesteryears. Essentially, international currency system is a facilitator that provides a set of internationally agreed rules and means of payment acceptable between the buyers and the sellers of different nationality with different national currency units. The international currency system has been marked by three different phases. The first was the gold standard system during 1875–1944. The second phase was the Bretton Woods system (1944–71) during which the gold standard system was replaced by gold-USD exchange standard. The third and the current phase began with the abandonment of the Bretton Woods system during the 1970s and adoption of a flexible exchange rate system by many countries. This chapter discusses these different phases of the international currency system, the flexible exchange rate regime, and departures from it through interventions of different kinds in the foreign exchange markets by countries to protect their national interests. India’s exchange rate policies in the 1990s to mitigate its BOP crisis are discussed as a case study.

The objective of this paper is to analyze the effect of exchange rate regimes on price stability through the role of institutions in order to draw lessons for SSA countries where this exchange rate policy has multiple financial, economic and social impacts. For this purpose, a panel data estimation using the Generalized Method of Moments in system was adopted and carried out on 35 countries for the period 1990-2020. Overall, the results show that, using the de facto classification of Ilzetzki, Reinhart and Rogoff (2019), under the direct effect on the one hand, membership of fixed exchange rate regimes reinforces the implementation of price stability policies, while flexible and intermediate exchange rate regimes rather disadvantage the extent of this stability. On the other hand, depending on the different combinations of exchange rate regimes with the composite index of political-economic institutions used, fixed and flexible exchange rate regimes reduce price volatility, while the intermediate exchange rate regime always disadvantages. We obtain a positive and significant effect of the composite index of institutions on inflation and also significant and expected effects of the different macroeconomic variables on inflation. For this reason, we recommend that these countries improve their framework of institutional configurations by providing favorable conditions for a monetary arrangement with capital mobility and a well-defined monetary regime, in order to maintain lower inflation in the long run, as well as political and economic stability in Sub-Saharan African countries. Then, as for the SSA countries that have opted for flexible and intermediate exchange rate regimes, we suggest that they opt for these regimes in order to further improve their room for manoeuvre offered by the natural autonomy of their monetary policy and take advantage of the competitiveness of their real equilibrium exchange rate regimes, which give better results in terms of financial equilibrium towards the path of sustained growth.

Will capital controls enhance macroeconomic stability? How will the results be influenced by the exchange rate regime and monetary policy reaction? Are the consequences of policy decisions involving capital controls easily predictable, or more complicated than may have been anticipated? We will answer the above questions by investigating the macroeconomic dynamics of a small open economy. In recent years, these matters have become particularly important to emerging market economies, which have often adopted capital controls. We especially investigate two dynamical characteristics: indeterminacy and bifurcation. Four cases are explored, based on different exchange rate regimes and monetary policy rules. With capital controls in place, we find that indeterminacy depends upon how the central bank’s response to inflation and its response to the output gap coordinate with each other in the Taylor rule. When forward-looking, both passive and active monetary policy can lead to indeterminacy. Compared with flexible exchange rates, fixed exchange rate regimes produce more complex indeterminacy conditions, depending upon the stickiness of prices and the elasticity of substitution between labor and consumption. We show the existence of Hopf bifurcation under capital control with fixed exchange rates and current-looking monetary policy. To determine empirical relevance, we test indeterminacy empirically using Bayesian estimation. Fixed exchange rate regimes with capital controls produce larger posterior probability of the indeterminate region than a flexible exchange rate regime. Fixed exchange rate regimes with current-looking monetary policy lead to several kinds of bifurcation under capital controls. We provide monetary policy suggestions on achieving macroeconomic stability through financial regulation.KeywordsCapital controlsOpen economy monetary policyExchange rate regimesBayesian methodsBifurcationIndeterminacyJEL CodeF41F31F38E52C11C62

The Interest Rate Parity Theorem: A Reinterpretation

The goal of this paper is to investigate the factors determining the impact of exchange rate regimes on the behavior of domestic investment and foreign direct investment (FDI), and the correlation between exchange rate volatility and investment. We assume that producers may diversify internationally in order to increase the flexibility of production: being a multinational enables producers to reallocate employment and production towards the more efficient or the cheaper plant. We characterize the possible equilibria in a macro model that allows for the presence of a short-run Phillips curve, under a fixed and a flexible exchange rate regime. It is shown that a fixed exchange rate regime is more conducive to FDI relative to a flexible exchange rate, and this conclusion applies for both real and nominal shocks. The correlation between investment and exchange rate volatility under a flexible exchange rate is shown to depend on the nature of the shocks. If the dominant shocks are nominal, we will observe a negative correlation, whereas if the dominant shocks are real, we will observe a positive correlation between exchange rate volatility and the level of investment.