Abstract
It appears likely that the number of currencies in the world, having proliferated along with the number of countries over the past 50 years, will decline sharply over the next two decades. The question I plan to pose here is: where, from an economic point of view, should we aim for this process to stop? Should there be a single world currency, as Richard Cooper (1984) boldly envisioned? Should there remain multiple major currencies but with a much stricter arrangement among them for stabilizing exchange rates, as say Ronald McKinnon (1984) or John Williamson (1993) recommended? Building on Maurice Obstfeld and Rogoff (2000b, d), I will argue here that the status quo arrangement among the dollar, yen, and euro (which I take to be benign neglect) is not far from optimal, not only for now but well into the new century. And it would remain a good system even if political obstacles to achieving greater monetary policy coordination (or even a common world currency) could be overcome. Again, this is not a paper on, say, the pros and cons of dollarization for small and medium-sized economies, but rather on arrangements among the core currencies. Any blueprint for the future core of the world currency system involves some crystal-ball gazing. But at the same time, recent research in international macroeconomics offers several important insights that can help inform the discussion.
Highlights
The question I plan to pose here is: where, from an economic point of view, should we aim for this process to stop? Should there be a single world currency, as Richard Cooper (1984) boldly envisioned? Should there remain multiple major currencies but with a much stricter arrangement among them for stabilizing exchange rates, as say Ronald McKinnon (1984) or John Williamson (1993) recommended?1 Building on Maurice Obstfeld and Rogoff (2000b, d), I will argue here that the status quo arrangement among the dollar, yen, and euro is not far from optimal, for but well into the new century
I have argued here that, into the foreseeable future, it would not be desirable to aim for a single world currency, and that from an economic point of view, it would be preferable to retain at least, say, three or four currencies, if not n currencies
Even if an optimal system requires some degree of monetary response to exchange rates, there is a case to be made that the current system already works reasonably well
Summary
The typical assessment of the modern floatingrate era begins by noting just how wrong Milton Friedman (1953) was when he envisioned flex-. Nothing could be further from the truth, and as virtually everyone knows exchange rates fluctuate wildly in comparison with goods prices. According to the “asset” view of exchange rates, it should be no surprise that they fluctuate almost as wildly as stock prices. Given that domestic goods prices tend to move very sluggishly, at least at the consumer level, one would think that goodsmarket arbitrage would prevent the exchange rate from fluctuating like a typical major stock price index— but, it does. While the exchange rate seems to gyrate wildly, it does not appear to feed back into the real economy with nearly the force and speed that one would expect for such an important relative price. Flexible exchange rates have proved far more volatile than Friedman envisioned, the flip side of the coin is a surprise. What’s the catch, and how should it affect our thinking about exchange-rate regimes?
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