The Limits of Monetary Coordination as Exchange Rate Policy
PROPOSALS FOR COORDINATION of monetary policy to stabilize nominal or real exchange rates or for targeting monetary policy on the nominal exchange rate assume, explicitly or implicitly, that exchange rate fluctuations are, on balance, harmful to the world economy and that monetary policy can productively reduce the amplitude of these fluctuations. The objective of this paper is to examine the analytical basis and empirical evidence for these assumptions. The conclusion is that both hold only some of the time. A coordination agreement would therefore have to define the circumstances under which the assumptions hold, a difficult task indeed. A third assumption in current proposals for a formal international conference to implement a coordination agreement—a " new Bretton Woods '—is that such an agreement is at least politically feasible. This assumption too is questionable. Toward the end of the paper I will argue that any international conference held now would resemble the failed World Economic Conference of 1933 far more closely than it would Bretton Woods.