Transition to Flexible Exchange Rates

In the process of reviewing three recent books on international monetary developments, this article focuses on both positive and normative aspects of the “exchange-rate crisis” and its effects on policy formulation in both developed and developing countries. It attributes short-run exchange rate volatility mainly to shifts in expectations and movements in international interest rate differentials; at the same time, it links long-run exchange rate movements to the current account positions of various countries. The article also focuses on the policy implications of such volatility in a world characterized by real as opposed to monetary disturbances and discusses the alternatives open to policy makers in that context. Finally, it critically evaluates the argument that flexible exchange rates among industrialized countries have benefited the less developed countries, and discusses the implications of these developments for their choice of exchange-rate regime.