Exchange Rate Systems in Perspective

It is concluded from informal cost-benefit analysis of alternative exchange rate systems that floating exchange rates have a strong advantage over fixed exchange rates, at least in the absence of common currencies. Economists lack strong evidence on how exchange rate systems affect the economic variables that people care about, such as long run growth, avoidance of dislocations from business cycles and so on. They also lack theory and evidence on how the choice of system affects the political forces that operate on monetary policies of central banks, and on their policies toward regulation, oversight and bailouts of financial institutions. It is concluded from informal cost-benefit analysis of alternative exchange rate systems that floating exchange rates have a strong advantage over fixed exchange rates, at least in the absence of common currencies.