BPEA | 1985 No. 2

Floating Exchange Rates: Experience and Prospects

Maurice Obstfeld
BPEA Obstfeld
Maurice Obstfeld Professor of Economics - University of California, Berkeley

1985, No. 2

WITH THE ABANDONMENT of fixed dollar exchange rates in March 1973, the world’s industrialized countries adopted temporarily a system of floating exchange rates that many economists had advocated to permit individual nations to reconcile the often conflicting requirements of internal and external balance. In spite of a surprising short-run volatility in exchange markets under the interim system, the consensus among policymakers at the end of 1975 was that floating rates had worked reasonably well. This consensus found expression in the joint declaration following the November 1975 Rambouillet economic summit, which committed participating monetary authorities to “counter disorderly market conditions, or erratic fluctuations, in exchange rates,” but made no provision for a return to fixed parities. Agreements at Rambouillet led directly to the formalization of the floating rate system through amendment of the Articles of Agreement of the International Monetary Fund (IMF) at Kingston, Jamaica, in January 1976. A new Article IV dealing with exchange rate arrangements implicitly sanctioned floating, subject only to broad prohibitions against actions detrimental to “financial and economic stability.”