Working Paper: NBER ID: w9971
Authors: Michael P. Dooley; David Folkerts-Landau; Peter Garber
Abstract: The economic emergence of a fixed exchange rate periphery in Asia has reestablished the United States as the center country in the Bretton Woods international monetary system. We argue that the normal evolution of the international monetary system involves the emergence of a periphery for which the development strategy is export-led growth supported by undervalued exchange rates, capital controls and official capital outflows in the form of accumulation of reserve asset claims on the center country. The success of this strategy in fostering economic growth allows the periphery to graduate to the center. Financial liberalization, in turn, requires floating exchange rates among the center countries. But there is a line of countries waiting to follow the Europe of the 1950s/60s and Asia today sufficient to keep the system intact for the foreseeable future.
Keywords: Bretton Woods; fixed exchange rates; capital controls; export-led growth
JEL Codes: F02; F32; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Periphery's strategy of undervalued currencies and export-led growth (F31) | Significant capital inflows into the U.S. (F21) |
| Significant capital inflows into the U.S. (F21) | Underwriting of U.S. current account deficits (F32) |
| Periphery countries accumulate reserves (F31) | Stabilization of the U.S. economy (E63) |
| U.S. current account deficit (F32) | Financing by official inflows from trade account and private inflows from capital account (F32) |
| Actions of Asian countries in managing exchange rates and accumulating reserves (F31) | Direct impact on the U.S. financial system (F65) |
| U.S. deficits (H62) | Influence on global capital flows (F32) |
| Global capital flows (F32) | Influence on U.S. deficits (H62) |