Working Paper: NBER ID: w2163
Authors: Jacob A. Frenkel
Abstract: This paper addresses the question of reform of the international monetary system. It starts by identifying the sources of disenchantment with the performance of the present regime of floating exchange rates and by outlining the reasons for the lack of convergence of views about the characteristics of the desired system. A central theme in the discussion is that a reform of the monetary system without a fundamental change in macroeconomic policies may be harmful. The analysis proceeds by examining the broader issues and principles relevant for an evaluation of reform. The key questions are: what should be reformed, what are the costs of reform and when should the reform occur. In this context special attention is given to the "target-zones" proposal for exchange rate management. The paper concludes with the observation that a reform of the system should not be viewed as an instrument for crisis management dominated by short-term considerations, but rather should be guided by long-term perspective. It is argued that if the root cause of the current economic difficulties is fiscal imbalances in the world economy, then a drastic reform of the international monetary system (if one is needed) might better wait until nations restore a more sustainable course of fiscal management.
Keywords: international monetary system; reform; exchange rates; fiscal policies
JEL Codes: F31; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| poor macroeconomic policies (E65) | failures of the current monetary system (E42) |
| fiscal imbalances (E62) | misalignments in exchange rates (F31) |
| misalignments in exchange rates (F31) | economic performance (P17) |
| ineffective policies (H53) | problems in the monetary system (E42) |
| timing and nature of reforms (E69) | success of reforms (P27) |