Working Paper: NBER ID: w2024
Authors: Warwick J. McKibbin; Jeffrey D. Sachs
Abstract: The volatility of the world economy since the breakdown of the Bretton Woods par value system of exchange rates has led many policymakers and economists to call for reform of the international monetary system. Many critics of the current "non-system" call for tighter international rules of the game in macroeconomic policy making. The proposed systems cover a wide spectrum of measures including maintaining the current flexible exchange rate system but with increased consultations between the major economies; a "target zone " system as advocated by John Williamson; or a full return to a system of fixed exchange rates as advocated by Ronald McKinnon This paper presents and applies a methodology useful for studying the operating characteristics of a number of alternative monetary arrangements using a large-scale simulation model of the world economy. We consider the performance of the regimes when policymakers do or do not observe the shocks, and when policymakers infer the shocks using an optimal filtering rule. Although the results are model specific and at best illustrative of the issues involved, the approach does have the advantage of providing a richer framework of analysis than is possible in simple models of international interdependence.
Keywords: exchange rates; monetary policy; economic volatility; international monetary system
JEL Codes: E42; F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| flexible exchange rate (F31) | better insulation from external shocks (L15) |
| observed shocks (E32) | lower variances in economic targets (E61) |
| shock observability (C69) | performance of monetary regimes (E42) |
| cooperative monetary policy (E52) | economic stability (E63) |
| non-cooperative monetary policy (E63) | likelihood of beggar-thy-neighbor policies (F52) |
| flexible exchange rate (F31) | mitigate negative impacts of foreign price level shocks (F16) |
| cooperative regimes (P13) | better economic outcomes (P17) |
| fixed regimes (P16) | negative economic impacts in unobserved shocks (F69) |