Working Paper: CEPR ID: DP14488
Authors: Maurice Obstfeld
Abstract: Fifty years ago, Harry G. Johnson published “The Case for Flexible Exchange Rates, 1969,” its title echoing Milton Friedman’s earlier classic essay of the early 1950s. Though somewhat forgotten today, Johnson’s reprise was an important element in the late 1960s debate over the future of the international monetary system. The present paper has three objectives. The first is to lay out the historical context in which Johnson’s “Case” was written and read. The second is to examine Johnson’s main points and see how they stand up to nearly five decades of experience with floating exchange rates since the end of the Bretton Woods system. The third is to review the most recent academic critiques of exchange-rate flexibility and ask how fatal they are to Johnson’s basic argument. I conclude that the essential case for exchange rate flexibility still stands strong.
Keywords: Exchange rate regimes; Floating exchange rates; International monetary system; Effective lower bound; Global value chains; Global financial cycle; Dominant currency pricing
JEL Codes: F31; F33; F41; F42; N20; N24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexible exchange rates (F31) | independent monetary policies (E58) |
| independent monetary policies (E58) | better domestic economic outcomes (P17) |
| flexible exchange rates (F31) | improved economic resilience (F69) |
| floating exchange rates (F31) | shock absorbers for real economic disturbances (E32) |
| fixed rates (E43) | crises due to inability to respond to economic shocks (H12) |